This is part two of our three-part series on the legal obligation to preserve digital evidence for discovery in the arbitration context. Part one outlined the inherent tension between arbitration, with its emphasis on efficient dispute resolution, and litigation, which has developed ever-more comprehensive and far-reaching (some might say excessively burdensome) rules for evidence preservation in the pursuit of procedural fairness and full disclosure. This article reviews the e-discovery frameworks and protocols being developed by various arbitral administrative bodies and looks at the outcomes of representative cases in which arbitration parties claimed that their opponents improperly failed to preserve digital evidence. Part three, which will appear next month, will offer some concrete suggestions on how to navigate the intersection between arbitration and e-discovery obligations.
Let’s begin with the arbitral bodies that have promulgated rules for electronic preservation and disclosure. The Document Disclosure Protocol of the International Institute for Conflict Prevention and Resolution, arguably the most direct rule governing arbitral e-discovery, recognizes that the “no stone left unturned” philosophy underpinning the traditional approach to litigation discovery should not be allowed to invade the arbitral hall. To that end, the Protocol permits back-up tape requests only “if the requesting party can demonstrate a reasonable likelihood that files were deliberately destroyed or altered by a party in anticipation of litigation or arbitration and outside of that party’s document retention policies operated in good faith.” This steep threshold stands in stark contrast to the typical litigation-oriented e-discovery spoliation standard, which deems the destruction of electronic files, even innocently or as part of and pursuant to a routine document destruction policy, as the basis for spoliation sanctions, including the imposition of adverse inferences.
Most arbitral bodies, however, have not yet promulgated explicit discovery rules regarding preservation of electronic data: The rules of the International Chamber of Commerce, for example, grant the arbitral tribunal itself the power to “summon any party to provide additional evidence,” but give no specific guidance as to what consequences should ensue when requested material has been destroyed. Similarly, the American Arbitration Association has no specific rule regarding retention and production of electronic evidence; instead, such matters are governed by Commercial Arbitration Rule 21, which grants each arbitrator authority “to resolve any disputes concerning the exchange of information.” Although this broad authority could be applied sparingly in service of arbitration’s overarching goals, nothing in this Rule prevents an arbitrator from imposing adverse inferences or other sanctions (e.g., remedial action, striking of pleadings and monetary sanctions) against a party for failing to preserve digital evidence.
In practice, arbitrators rarely resort to issuing mandatory adverse inferences based upon the spoliation of digital evidence. Any arbitrator that issued such an order would, after all, be creating the predicament of binding himself or herself to substantive findings of fact before reviewing all relevant evidence. As a federal district court judge recently noted when such sanctions were sought in a bench trial, “Why in the world would I direct myself that I must infer something prior to hearing all the facts on which the inference would be given context?”
Nevertheless, arbitral panels intent on taking remedial action in response to an event of spoliation have issued monetary sanctions for “failure to produce all email notes on Respondent’s computer” and have considered imposing adverse inferences. At the other end of the spectrum, some panels, recognizing that arbitration’s goals differ from those of litigation, have declined to issue sanctions even when production has been less complete, so long as production was “proportional and sufficient for a full and fair hearing without any showing of prejudice.” (One might argue that arbitrators who take this approach are actually hewing closely to Rule 1 of the Federal Rules of Civil Procedure.) The range of outcomes only emphasizes the uncertainty created by spoliation motions in arbitration—while these motions might be dismissed out of hand, they could also cause a party’s entire case to crumble. And, of course, once the arbitrator rules, there will be no judicial relief unless there has been an “egregious departure” from the agreed-upon arbitration.
One more point to consider: Even when arbitration is complete, the duty to preserve may linger on. One New York court in Creative Res. Grp. of New Jersey, Inc. v. Creative Res. Grp., Inc. found that a party that engaged in an arbitration had a duty to preserve electronic evidence for potential future litigation, noting that the earlier arbitration had put the company “on general notice that the company documents might be relevant to litigation.” Companies that were not even parties to an arbitration have successfully brought fraudulent concealment claims against an entity that failed to provide emails during that arbitration, on the theory that if the documents been produced, the outside party would have had a claim against the respondent. The defendants in these suits may have thought that because they were involved in arbitration, they didn’t need to worry about preservation, only to be later unpleasantly surprised.
The bottom line is that there are no clear and definite standards as to whether the Zubulake rules apply outside of the litigation context. Whether a party faces a risk of sanction will likely depend upon the composition and predisposition of the arbitral panel. In other words, the tension between arbitration’s core goals and the demands of litigation has resulted in unpredictability, which is not favored under either regime. Being obligated to comply with a litigation hold when entering arbitration would substantially reduce the economic value that arbitration should offer. Crossing your fingers and hoping that your arbitration panel will decline to issue sanctions wouldn’t be much better. Arbitration panels and participants need a clear set of guidelines to signal their responsibilities, and those guidelines ought to be set in line with the goals of arbitration itself.
The final installment of this series will set forth practical advice on how to reduce the uncertainty regarding preservation duties in arbitration. These simple instructions will offer real world solutions that will help reduce the level of risk now present for unsuspecting participants in arbitration.