E-Discovery Preservation and Production: Sanctions Are on the Rise – Plan Well, or Watch Out!
By: EMILY E. DUKE
March 2011
Sanctions for discovery violations related to electronically stored information (ESI) are clearly on the rise, according to a recent study published in the Duke Law Journal. According to the study’s authors, e-discovery issues appeared in cases as early as the 1970’s, but the threat of sanctions has only recently become a more prevalent concern. Alarmingly, the study found that there were more e-discovery sanction cases in 2009 alone, than in all years prior to 2005 combined. 2009 also topped prior years for sanction awards. The study’s authors also pointed out that, unlike other areas of law, Courts rely on a wide variety of rules, statutes and “inherent powers” when meting out e-discovery sanctions. Interestingly, the study also found that defendants have historically, and continue to be, sanctioned for e-discovery violations almost three times as often as plaintiffs. Sanctions are most often awarded when a party commits a combination of preservation and production violations. See, Dan H. Willoughby, Rose Hunter Jones, and Gregory R. Antine, “Sanctions for E-Discovery Violations: By The Numbers,” (December 2010) Duke Law Journal. The authors looked at motions involving e-discovery in Federal Courts prior to January 1, 2010.
The study is quite timely in light of some recent high-stakes sanctions cases. For example, in Sunrider Corp v. Bountiful Biotech Corp., 2010 WL 4590766 (C.D.Cal. October 8, 2010)(not reported in F.Supp.2d), the Court dismissed a Defendant’s Answer and struck its Counterclaims after the Plaintiff established a pattern of perjury and cover-ups throughout discovery, through which the Plaintiff sought to establish ownership and control of various Defendant entities, in an international trademark infringement case. The Sunrider Court was especially troubled by Defendants’ manipulation of its corporate affairs so as to claim, once litigation was commenced and discovery issued, that it did not have control of the requested documents or ESI. The Court explained that “a party may not sidestep its discovery obligations by deliberately rearranging its affairs to disable itself from being able to produce documents after litigation has commenced.” Sunrider 2010 WL 4590766 at *8. The Court based its sanctions award on Rule 37, and its inherent power to sanction a party “substantially motivated by vindictiveness, obduracy, or mala fides.” Sunrider 2010 WL 4590766 at *26. The Court listed five factors that should be considered before imposing a case-dispositive sanction: (1) the public’s interest in expeditious resolution of litigation; (2) the court’s interest in managing its docket; (3) risk of prejudice to party seeking sanctions; (4) public policy favoring disposition of cases on the merits; and (5) availability of less drastic sanctions. The Sunrider Court noted that not all five factors needed to be present in order for it to impose a case-dispositive sanction. Sunrider 2010 WL 4590766 at *26.
In another case, Victor Stanley, Inc. v. Creative Pipe, Inc., No. MJG-06-2662 (D.Md. Jan 24, 2011)(Victor Stanley II), the Court ordered Defendant to pay Plaintiff over $1 million to compensate Plaintiff for time spent to discover and investigate the scope of discovery abuse/spoliation (including expert fees) and bring its motion(s), as well as for extra discovery necessitated by Defendant’s extensive spoliation. The Court noted that Defendant’s e-discovery violations “voraciously consumed the Court’s time and resources” and consumed even more of the Plaintiff’s. The Court went into a detailed analysis of time descriptions, time spent and attorneys’ rates charged in determining the reasonableness of the fees sought by Plaintiff, and ordered Defendant to pay Plaintiff over $335,000 by the end of the week or appear and show cause why the Defendant’s President should not be thrown in jail. (For those interested in fee awards in particular, the Court’s analysis is educational with regard to delegation of tasks to timekeepers at various rates and experience levels, and with regard to time entries where more than one lawyer was present.)
However, not all cases involving spoliation result in sanctions. In Huggins v. Prince George’s County, Maryland, ___ F.Supp.2d ___ 2010 WL 4484180 (D. Md. November 9, 2010), the Court found that no spoliation sanctions were warranted when a municipality failed to preserve a former employee’s email account and, as a result, discoverable evidence was lost. The case involved issues relating to zoning and permitting of certain property. A former county employee had been involved in a decision not to allow Plaintiff to immediately reopen its facility on the property. A dispute arose and was settled, but the settlement left open the possibility for further claims, unrelated to the settled claims, to be brought. The employee left his job eight months after the first litigation was settled, and a year before the second litigation was filed. Six months before the second litigation was started, the former employee’s email account was deleted. The Court held that the settlement agreement alone, with its clause that left open the possibility for additional claims, did not give rise to a preservation obligation. Instead, the filing of the lawsuit gave rise to the obligation (no letters threatening to bring suit were involved). The Court found that no preservation obligation existed at the time the email account was destroyed. Critical to the Court’s analysis, was the fact that the former employee’s email account was deleted as part of a standard operating procedure relating to destruction of email accounts of former employees.
Similarly, in Orbit One Communications, Inc. v. Numerex Corp., ___ F.R.D. ___, 2010 WL 4615547 (S.D.N.Y. October 26, 2010), the Court refused to impose an adverse inference jury instruction sanction for destroyed evidence, holding that a necessary, but insufficient, condition to imposing sanctions is a finding that the requested evidence existed and was destroyed. The information sought must also be at least marginally relevant. Orbit One 2010 WL 4615547 at *11. The Court also noted that depending on the circumstances of the case, “the failure to [issue a written litigation hold] does not necessarily constitute negligence, and certainly does not warrant sanctions if no relevant information is lost. For instance, in a small enterprise, issuing a written hold may not only be unnecessary, but it could be counterproductive.” Orbit One 2010 WL 4615547 at *11. Nevertheless, the Court also gave cold comfort to practitioners and litigants who believe that preservation obligations (not just production obligations) should be guided by principles of proportionality and reasonableness, noting 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. Until a more precise definition is created by rule, a party is well-advised to retain all relevant documents in existence at the time the duty to preserve arises.” Orbit One 2010 WL 4615547 at *6.
Despite the amendment of the rules relating to e-discovery several years ago, the reality of rapidly changing technology (smart phones, social media, cloud computing) and its resulting explosion of bits and bytes of discoverable data, have caused e-discovery obligations to become more complex, more expensive, and sometimes less clear in any given situation. Rule 37(e) provides only limited protection against sanctions associated with routine operation of electronic systems – it does not protect against sloppy preservation efforts or downright willful destruction of evidence. Therefore, litigants and their counsel are well-advised to work with key information-holders and IT support personnel to come up with defensible ESI preservation plans early on, so as to avoid expensive motions, and possibly sanctions or orders requiring payment of opposing counsel’s fees, later on.