09/22/15

In This Issue

Sanctions For Failure to Preserve Electronic Evidence Under the New Federal Rules

David A. Kushner and Joseph P. Moriarty

The Judicial Conference Advisory Committee on Civil Rules recently approved revisions to the Federal Rules of Civil Procedures, including revisions to Rule 37(e) regarding sanctions for when a party fails to preserve electrically stored information (ESI).  The Supreme Court approved these rules, which are set to go into effect in December 2015 pending Congressional approval.  In our next newsletter, we will provide a detailed summary of all of the new rules.  In this installment we will specifically focus on a topic that is of great interest to our clients:   Sanctions for failure to appropriately preserve ESI. 

Over the past decade, the news has been littered with examples of companies and their lawyers being sanctioned for failing (usually inadvertently and without any malice) to effectively preserve potentially relevant information.  These sanctions have included monetary sanctions, adverse instructions to the jury that it should assume there is missing evidence damaging to the company, and even entry of judgment against the company.  The caselaw on sanctions has been highly inconsistent, making it very difficult for companies and their lawyers to determine what is an appropriate preservation strategy under the circumstances.   

The proposed amendment to Federal Rule of Civil Procedure 37(e) is intended to create a more uniform approach to sanctions for loss of ESI in federal courts.  Prior to the adoption of this rule, federal courts have taken a number of different (and sometimes inconsistent) approaches in determining when a party’s failure to preserve potentially relevant ESI should result in severe sanctions. While some courts will impose severe sanctions for mere negligent failure to preserve ESI, other courts require a showing of willful or bad faith failure to preserve. This uncertainty has caused many potential litigants to over-preserve ESI out of fear that they might be severely sanctioned if they fail to preserve some piece of electronic evidence.

The current version of Rule 37(e) was adopted in 2006.  It provides:

Failure to Provide Electronically Stored Information. Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information loss as a result of the routine, good-faith operation of an electronic information system.

This so-called “safe harbor rule” generally applies when a litigant destroys data as part of a routine document retention and destruction program, but before litigation was reasonably anticipated.  Since its adoption, the “safe harbor rule” has been invoked rarely. Most argue that it provides no relief from growing pre-litigation preservation burdens on potential litigants. In fact, the current version of Rule 37(e) provides no guidance regarding when a court should impose severe sanctions for the loss of ESI.

The proposed amendment to Rule 37(e), as currently drafted, provides:

Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1)  upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2)  only upon a finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(a) presume that the lost information was unfavorable to the party;

(b) instruct the jury that it may or must presume the information was unfavorable to the party; or

(c) dismiss the action or enter a default judgment.

As discussed below, the proposed amendment to Rule 37(e) authorizes and specifies a graduated series of curative measures a court may employ if ESI that should have been preserved is lost, and specifies the findings necessary to justify these measures.

Step One: Measures to Cure Loss of ESI

Under subdivision (e) of the proposed amendment, the court must conclude that a party failed to take reasonable steps to preserve ESI that should have been preserved in anticipation of litigation, “and it cannot be restored or replaced through additional discovery.” The “additional discovery” provided under subdivision (e) does not require a showing of culpability or prejudice. As a result, a party’s negligent loss of ESI could result in additional discovery that would not have been allowed had the party preserved ESI, including from sources of ESI that are not reasonably accessible because of undue burden or cost. Moreover, a party’s negligent failure to preserve ESI may justify discovery that otherwise would be precluded under the proportionality analysis of Rule 26(b)(1) and (2)(C). In addition to (or instead of) ordering further discovery, the court may order other curative measures, such as requiring the party that failed to preserve ESI to restore or obtain the lost ESI, or to develop substitute information that otherwise would not be required.

Step Two: Measures to Cure Prejudice Caused by Loss of ESI

Subdivision (e)(1) of the proposed amendment authorizes measures to cure demonstrated prejudice resulting from loss of ESI. If the curative measures authorized by subdivision (e), are effective, resorting to the measures in (e)(1) should be unnecessary. Notably, the proposed amendment does not place the burden of proving or disproving prejudice on one party or another. The proposed amendment leaves judges with discretion to determine how best to assess prejudice in particular cases. Typically, the burden of proving prejudice is on the party seeking the sanction against an opposing party, but the proposed amendment recognizes that determining the content of lost ESI may be a difficult task in certain situations. It is likely that courts will place the burden on the party who lost the ESI to prove that the lost ESI did not prejudice the other party.

Once a finding of prejudice is made, the court is authorized to employ additional curative measures no greater than necessary to cure the prejudice. This may include evidence preclusion to even the playing field. Also, the court may allow evidence and argument to the jury regarding the loss of ESI or giving jury instructions on missing evidence other than those limited by subdivision (e)(2), discussed below. The proposed Committee’s Note to Rule 37(e) cautions that care should be taken to ensure that curative measures under subdivision (e)(1) should not have the effect of dismissal or default.

Step Three: Severe Measures to Address or Deter a Party’s Failure to Preserve ESI with the Intent to Deprive Another of the ESI’s Use in the Litigation

Under subdivision (e)(2) of the proposed amendment, courts are authorized to use very severe measures for the loss of ESI only on finding that the party who lost the ESI acted with the intent to deprive another party of the ESI’s use in the litigation.  The proposed amendment rejects decisions that have authorized the imposition of severe sanctions for negligence or gross negligence. However, the proposed amendment does not limit the ways in which a court may arrive at a finding of intentional conduct. A court has substantial leeway to determine intent through direct evidence, circumstantial evidence, witness credibility and other relevant factors.

In conclusion, the proposed amendment to Rule 37(e) would preclude a federal court from issuing severe sanctions -- such as an adverse-inference jury instruction, dismissal of the lawsuit, or entry of default judgment -- for the mere negligent loss of ESI. At the same time, the proposed amendment permits federal courts to issue less severe measures to cure the loss of ESI, which can rise to the level of evidence exclusion or allowing the parties to present evidence of spoliation to the jury.

While the proposed amendment may provide some guidance for federal courts on handling a party’s loss of ESI that should have been preserved in anticipation of litigation, it does not provide much guidance to potential litigants in making preservation decisions. Even under the proposed amendment to Rule 37(e), there remain significant downsides to a party failing to preserve ESI when triggered by the anticipation of litigation. Accordingly, businesses should take steps to eliminate the risk of sanctions by understanding the duty to preserve, and taking reasonable steps to collect and preserve ESI once the duty to preserve is triggered. However, if the proposed Rule 37(e) is approved, litigants can take comfort in the fact that the most severe sanctions will be reserved for intentional or bad faith destruction of evidence.


Court Orders Sanctions for Failing to Preserve Text Messages

Phillip H. Hucles

A district court for the Central District of California recently held that sanctions were warranted against an employer, Shippers Transport Express, Inc. (Shippers), because it failed to protect relevant text messages between Shippers’ managers and purported employees.

In Perez v. Shippers Transp. Express, Inc., Case No. 13-4255 (C.D. Cal. July 8, 2014), the Department of Labor instigated suit on behalf of purported employees of an employer that maintains terminals and storage yards and that coordinates transportation for cargo containers arriving in the Port of Oakland.  After an administrative review, the California Wage and Hour Division determined that Shippers violated the FLSA when it misclassified its drivers as independent contractors – the Department of Labor subsequently filed suit on behalf of the drivers.

During discovery, the Department of Labor requested, among other things, any text messages between Shippers and the drivers.  The Department of Labor argued that the text messages could establish that Shippers maintained a high level of control over the drivers and therefore could evidence an employment relationship.  After objecting to the request, Shippers represented that no relevant documents existed.

The Department of Labor subsequently conducted depositions of several Shippers managers.  During these depositions, managers admitted to using text messaging to communicate with the drivers.  The Department of Labor inquired why Shippers failed to produce any of these documents and the managers asserted that Shippers never told them to preserve the text messages and that they routinely deleted them – even after the litigation commenced.  Based on this new information, the Department of Labor conferred with Shippers’ attorneys regarding whether a motion for sanctions should be filed.

Shippers maintained that it had no knowledge that its managers communicated with the drivers via text messaging.  After conducting a review, Shippers admitted it failed to safeguard the documents but would take steps to correct any failure on its part.  Shippers produced a large portion of the text messages, but many text messages were unrecoverable.

The Department of Labor moved for sanctions and the court agreed that Shippers’ conduct warranted sanctions.  Shippers’ primary defense was that it had no knowledge that its managers communicated with drivers via text message and thus should not suffer sanctions from its failure to produce documents it did not know existed.  It also argued that it immediately engaged in corrective action to rectify its failure.  Among other things, the court found that Shippers had failed to implement an effective litigation hold which led to the destruction of relevant evidence and prejudice to the Department of Labor.  The court found little merit in Shippers’ argument that it was unaware that relevant text message evidence existed on managers’ phones used to conduct business.  The court also rejected Shippers’ argument that text messaging was a new technology and that it only just became aware of the prevalence of its use.  The court stated that an effective litigation hold could have prevented the problems and that text messaging is a common manner of communication.  Because Shippers had no substantial explanation for its failure to preserve and produce the relevant evidence, the court imposed sanctions, including an adverse inference instruction to the jury.

This case represents a cautionary tale for employers.  First, establishing document retention programs and drafting effective litigation holds are necessary preliminary steps in document intensive litigation.  Second, you must understand your business and the tools of communication used by your managers and employees.  E-discovery is a fast-changing and dynamic area of the law.   Employers must continue to educate themselves with respect to the new technologies it provides its managers and employees and how they may use them.    


Using the Concept of Proportionality to Limit Discovery Costs

Jason E. Ohana

One important limit on the scope of discovery obligations, including e-discovery and preservation obligations, is “proportionality.”  This article discusses what proportionality means, how to achieve it in litigation, and the trend toward a new emphasis on proportionality in discovery.

What is proportionality?

Under the current Federal Rules of Civil Procedure, a discovery request is objectionable if “the burden or expense of the proposed discovery outweighs its likely benefit,” considering the following five factors:

a) The needs of the case;

b) The amount in controversy;

c) The parties’ resources;

d) The importance of the issue at stake in the action; and

e) The importance of the discovery in resolving the issues.

FRCP 26(b)(2)(C)(iii).  Virginia Supreme Court Rule 4:1(b)(1) contains a similar proportionality provision.  In addition to this general proportionality requirement, the Federal Rules also specifically address proportionality in the context of e-discovery requests.  The Rules provide that, “A party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.”  FRCP 26(b)(2)(B).  Virginia Supreme Court Rule 4:1(b)(7) contains a similar provision.

In short, if the burden or expense of complying with a request outweighs its likely benefit, the request is objectionable.  This sounds simple in theory, but in practice, the parties will seldom agree on the “likely benefit” of the material being requested. 

How do litigants handle disputes over what is proportional?

There are two basic ways to deal with proportionality disputes during discovery: proactively, by negotiating an e-discovery agreement with opposing counsel, and reactively, by filing and responding to motions to compel and motions for protective orders.  The proactive approach requires more work at the front end, but it can alleviate a lot of the work and uncertainty that comes with prosecuting discovery motions.  The proactive approach involves trying to reach an agreement with opposing counsel, setting the parameters and search methodologies to be used in e-discovery, or moving the Court for an order doing the same.  E-discovery expertise is critical at this stage as attorneys negotiate the contours of an e-discovery agreement and/or move the Court for entry of a favorable order governing e-discovery. 

A good e-discovery agreement will typically address the following topics:

  • Order of Production – who produces what, when
     
  • Production Format – including whether metadata needs to be preserved
     
  • Confidentiality – including whether data will be returned or destroyed at the end of the litigation
     
  • Privilege – including whether the parties can “claw back” inadvertently produced documents
     
  • How discovery disputes will be addressed
     
  • How costs will be handled

In each of these areas, parties should consider proportionality.  For example, agreeing to a claw-back provision can substantially reduce the parties’ costs in reviewing documents for privilege.  This can make requests for voluminous electronic productions less expensive and thus less susceptible to proportionality challenges.  Another important consideration is flexibility; discovery agreements should have some flexibility built into them, as discovery needs and burdens are likely to become clearer throughout the discovery process.   

What do the 2015 Amendments say about proportionality?

The 2015 amendments to the Rules of Civil Procedure, which go into effect in December, retain the proportionality requirement and, in fact, emphasize it.  The drafters moved the proportionality requirement into the sentence that defines the scope of discovery: “Parties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case . . . .”  Proposed FRCP 26(b)(1).  The Committee Notes clarify that this change does not substantively alter the responsibilities of the parties or the Court, but instead was meant to emphasize the proportionality requirement. 

Conclusion

Proportionality remains perhaps the most important bulwark against abuse of the discovery process.  Litigants need to understand its contours in order to make cost effective decisions about their case.  When a company is making pre-litigation decisions about what needs to be preserved for future discovery, it should consider the proportionality defense.  However, pre-litigation decisions should err on the side of over-preservation, as there is no bright line test of what is proportional for a specific matter.  Once litigation begins, businesses should work with their e-discovery counsel to create a proactive strategy to limit discovery costs by only conducting discovery that is proportional to the case. 
  

Managing Your Preservation & Review Strategy

Amanda S. Merrill

As discussed in previous articles, a company’s duty to preserve potentially relevant evidence is triggered as soon as litigation is (or should be) reasonably anticipated.  The process of determining what evidence a company must collect and how to preserve it has become increasingly complex as the universe of Electronically Stored Information (ESI) continues to expand almost exponentially.   In response to the continued expansion of ESI, the e-discovery industry has continued to create, update, and market new tools to help companies (and their lawyers) preserve, review and produce electronic evidence. 

A few of the most common tools for preserving, reviewing, and producing evidence are discussed below.  In most cases, determining which of these tools is appropriate for a particular matter will require input from: (1) in-house or outside counsel familiar with e-discovery; (2) internal IT professionals familiar with the company’s storage architecture; and (3) internal management familiar with the facts of the case and the employees or other custodians likely to have relevant information. 

Potential “Tools” Related to Preservation of Evidence

  • Litigation Hold Letter:   Early case assessment should generally begin with identifying which employees are likely to have relevant information.  It will almost always be necessary to send these custodians a litigation hold letter which directs them not to delete or destroy specified files.   We suggest that you work with in-house or outside counsel to draft this initial letter, which sometimes must be updated or expanded to a larger audience as you learn more about the case. 
     
  • Database Litigation-Hold Mode:  Many email and document management systems have a “litigation hold” mode that automatically preserves emails and documents (overriding any other attempt to delete an item), and suspends normal archiving and deletion protocols.  We suggest that our clients work with their internal IT professionals to understand what options are available internally so that you can effectively implement these options as a required (but not necessarily sufficient) response to a litigation hold.  
     
  • Basic Electronic Backups:  Depending on the size and scope of the case, a cost-proportionate preservation can sometimes be as straightforward as an IT department backup of identified email accounts, user profiles, and/or servers. In some instances, those backup files can simply be secured to maintain chain of custody until specific information or new questions make data from those computers or email accounts relevant.  Whether this strategy is reasonable under the circumstances will depend on the facts of the case, and whether an authenticated “forensic” backup is called for under these facts. 
     
  • Forensic Imaging: In specific types of cases, it may be necessary to engage a credentialed vendor to collect a forensic image of computers or other electronic devices.  This kind of collection involves making a mirror image of an entire device without impacting any metadata or other less-visible or hidden information.   Metadata includes information about documents, such as the author, the date on which it was accessed or changed, and other potentially relevant information.   Making a normal backup copy (see above) or continuing to use a computer can cause this meta-data to be lost or altered.  So in a case where it is important to determine how or when a computer, phone or specific document was used, a forensic image may be necessary, notwithstanding the increased expense of obtaining such images.
     
  • Storage Options:  When the duty to preserve is triggered, a company must not only determine what to preserve, but also how and where to preserve it.   In simple cases, it might be enough to secure the backed up information on internal servers or an external hard-drive.  In more complex cases, it may be necessary to consider storage solutions with a third-party forensic expert or software vendor.   

Potential Tools Related to Reviewing and Producing the Preserved Information

If a dispute proceeds to litigation, you will need to review and then produce a subset of the information that was originally preserved.  Document review has become the most expensive part of litigation. The sheer volume of potentially responsive ESI increasingly threatens to outweigh the proportional value of the issues at stake.  Opposing counsel may be able to wield the threat of costly and prolonged e-discovery motions practice in an attempt to force concessions to avoid the cost of compliance.  But there are an ever expanding host of approaches and tools to consider during the review process:  

  • Classic Internal Review with Counsel: An attorney who has detailed familiarity with all documents relevant to a matter can strategize and make judgment calls with tremendous precision. If the universe of potentially relevant files can be defined narrowly enough, conducting a beginning-to-end classic document review can be a significant advantage.  Even as cases grow, often a tiered review can be structured to ensure that the most cost-effective team member filters out irrelevant or redundant files and only escalates highly-relevant files for further focused analysis.
     
  • Hosted Review with Contract Attorneys: When the unique circumstances of a matter require the collection and preservation of more files than can be realistically reviewed by an in-house or law firm team, many vendors are staffed to provide licensed-attorneys on a contract basis to handle the first-pass of a review project.  Even after drafting a detailed outline of the issues in the case and investing time in initial training of the contract attorneys, a significant time and cost savings can be realized from the ability to flexibly scale-up or trim down your compliment of licensed attorneys while simultaneously freeing up internal resources.
     
  • Targeted Review, Predictive Coding and Data Analytics:  Experienced e-discovery teams can often decrease the cost of a major document review by using tools to limit the documents to be reviewed to those most likely to be relevant.   Historically, this was done by an agreed  keyword search, followed by a review of the documents that include the keyword.  In the last few years, “predictive coding” has become a popular option.  Predictive coding involves conducting an attorney review of a small sample of the data set, with the attorney tagging items which are relevant in the sample.   Software then uses algorithms to predict the files in the remainder of the data set which are most likely to be relevant.   Attorneys can then agree to limit their review to those documents which are most likely to be relevant. 
     
  • Forensic Analysis: In some unique instances, the words on the page of a document may be far less interesting than when and how the specific device and document was used or altered.  In that instance, the expert analysis and testimony of a forensic expert will add tremendous value to your case.  Be sure to retain someone who understands how to translate the technical jargon of metadata and hidden files into clear language.  The added cost of an experienced expert is justified in a case that hinges on forensic evidence.  It can also be balanced against the benefit of bypassing authentication and conflict questions that might arise if collection and preservation work was done by in-house technical staff. 

The tools available for managing the e-discovery component of litigation evolve constantly in response to the ever-developing capabilities of modern technology.  Determining which tools are appropriate, sensible and proportional under the circumstances is a difficult and fact specific inquiry.   Predicting whether a court will agree that your preservation strategies were reasonable and proportional is as much an art as a science, and requires a detailed knowledge of current technology and e-discovery law.  Thus, we recommend that larger companies maintain an ongoing committee on e-discovery, and that this committee work with competent e-discovery counsel to determine the appropriate strategy for each specific case.   

If you have any questions about this newsletter, or if your company has e-discovery related needs, contact Joe Moriarty or David Kushner, or click here to learn more about our E-Discovery Practice.

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