Discovery Discipline: Courts Impose Sanctions for Failure to Disclose Discoverable Data

Read more about cases involving Federal Rule of Civil Procedure 37 here.

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Three years after the effective date of amendments to the Federal Rules of Civil Procedure governing disclosure of electronically stored information (ESI), companies still struggle with implementing e-discovery policies and procedures.

Just 57 percent of U.S. companies report having a mechanism in place to suspend their document retention/destruction policies in response to litigation or an investigation, commonly known as a litigation hold procedure, according to a survey released in October by Kroll Ontrack, a legal technology consultancy.

A recent flurry of court actions awarding sanctions under Federal Rule of Civil Procedure 37, which provides penalties for failure to disclose discoverable data, illustrate that implementing legal holds remains a significant problem for many companies involved in litigation.

Those sanctions can be devastating to the case of the party against whom they are granted. Potential sanctions include barring the party from asserting its affirmative defenses and ordering an adverse inference instruction to the jury that the missing evidence would have been favorable to the opposing party. Such instructions often result in unfavorable verdicts.

For example, the Federal District Court for the Southern District of New York found on June 30 that the defendants in Arista Records v. Usenet.com acted in bad faith by permanently deleting relevant data from seven hard drives. Their failure to preserve e-mails and other documents relating to terminated employees was grossly negligent, the court said. As a result, the court barred the defendants from asserting their affirmative defenses and granted summary judgment to the plaintiffs.

"Sanctions occur because, all too often, risks are taken and legal holds are not declared when controversies and potential litigation first occur," says B. Jay Yelton III, a principal at Miller Canfield.

Grimm Message

In Goodman v. Praxair, a case in the Federal District Court for the District of Maryland, Magistrate Judge Paul Grimm, a respected authority on e-discovery issues, defined three elements a party seeking sanctions in such e-discovery disputes must prove: that the opposing party had a duty to preserve the evidence; that the destruction or loss was accompanied by a "culpable state of mind"; and that a reasonable fact-finder could conclude that the lost evidence would have supported the claims or defenses of the party that sought it. He defined culpability as including bad faith or knowing destruction, gross negligence and ordinary negligence.

On July 7, Judge Grimm found that the plaintiffs in Goodman had satisfied these conditions. He ordered an adverse inference instruction to the jury that the missing evidence would have been favorable to the plaintiffs.

Grimm determined that the defendants "willfully destroyed evidence that it knew to be relevant" by destroying the laptop of a "key player," and that the key player willfully deleted e-mails after the preservation obligation was triggered.

But in many other situations, data destruction can be inadvertent rather than deliberate.

"Such situations often are the result of 'acts of omission' rather than deliberate destruction of relevant data," says Michael McGuire, a shareholder and e-discovery counsel at Littler Mendelson.

Hold Triggers

Yelton emphasizes that once a company reasonably anticipates litigation, it is obligated to suspend its routine document retention/destruction policy and implement a litigation hold to ensure the preservation of relevant documents. Courts can impose huge discovery sanctions when essential records are not produced because they have been automatically deleted or overwritten.

The issue of what triggers a litigation hold continues to trip up companies. Courts have found that the obligation to implement a hold precedes any formal notification of litigation. For example, in KCH Services Inc. v. Vanaire Inc., the Federal District Court for the Western District of Kentucky on July 22 ordered an adverse inference instruction against a defendant for failing to implement a litigation hold and deleting e-mails and other ESI. In this case, the court said the obligation to hold relevant data was triggered by a phone call to Vanaire from KCH's president complaining that Vanaire was illegally using KCH software.

Despite such rulings, some companies apparently don't understand the importance of implementing litigation holds.

"Even after litigation begins, companies may still fail to implement litigation holds, convinced that the case will settle or be quickly dismissed," Yelton says.

Other problems arise because the right hand doesn't know what the left hand is doing. The legal department needs to be familiar with how the company's information technology works to effectively implement litigation holds--a challenging task. "Counsel need to take a more proactive approach because IT infrastructures have become so large, complicated and decentralized," McGuire says.

Team Approach

That proactive role involves working with the IT department to determine what applications are being used throughout the enterprise, what kind of data the enterprise produces and whether the data is purged at regular intervals.

"This information is vital to the litigation team, but corporate IT often just can't provide it," says consultant Leigh Webber, president of the Practice Management Institute. "As businesses buy other companies, some noncritical applications do not become integrated into the parent company's data map. When litigation strikes, the e-discovery team must scurry to conduct interviews with custodians to determine the location of these unrecorded data depositories."

Problems also arise in tracking who is responsible for areas of data after personnel changes. Webber calls this process the "custodian churn." He suggests that HR departments notify the legal department whenever a new person assumes a job that involves creating or editing ESI.

Ralph Losey, shareholder in Akerman Senterfitt, recommends the formation of a permanent interdisciplinary e-discovery team consisting of legal, IT, records management, compliance, HR and other key departments. Otherwise, data maps may fail to represent an organization's changing structure.

Losey further recommends that all ESI--whether subject to a litigation hold or not--be audited and certified by an outside firm before it is destroyed to satisfy good faith and due diligence requirements against any claims of spoliation.

In the Kroll Ontrack survey, 58 percent of U.S. companies reported using licensed software to implement litigation holds, as opposed to manual systems or homegrown technology. Many enterprise systems search data storage systems and build a constantly updated index.

"Think of it like an internal Google that can see everything in the enterprise," Webber says. "This lets legal collect and preserve only the data that's relevant to the case."

Michael Kozubek

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