Category Archives: E-Discovery

Two Must-Reads for e-Discovery Lawyers

There are two new must-reads for lawyers who frequently encounter e-discovery issues.   A decade after The Sedona Conference’s 2007 publication of The Sedona Principles (2d ed.), the Public Comment Version for the forthcoming third edition has been released.  This impressive work will certainly be recognized as the updated bedrock guidance on nearly all e-discovery issues.  Study The Sedona Principles (3rd ed.) after reading Thomas Freidman’s Thank You for Being Late.  Friedman, a three-time Pulitzer Prize winner, connects the warp-speed technological developments to our everyday life.  Trust us when we say that these two publications plug together.

The Sedona Principles (3rd ed.)

In March 2017, The Sedona Conference released the Public Comment Version of the Sedona Principles, Third Edition: Best Practices, Recommendations of and Principles for Addressing Electronic Document Production (available for download at no cost here).   The Sedona Conference papers are widely acknowledged to be the gold standard works on e-discovery issues.  This Third Edition of The Sedona Principles integrates e-discovery developments over the last decade in a comprehensive update of the earlier landmark work.

The first publication of The Sedona Principles was back in 2003.  Following the arrival of the 2006 e-discovery amendments to the Federal Rules of Civil Procedure, the Conference published in 2007 its Second Edition of The Sedona Principles.

A decade later, the 133-page Third Edition of the Principles identifies “fourteen succinct statements that embody the consensus view of [Working Group 1] on a reasonable and balanced approach to the treatment of electronically stored information in the legal process.”  Each Principle is further explained in detailed commentaries.  This format, followed in most of the Sedona e-discovery publications, delivers common-sense yet sophisticated analysis.

Those who are familiar with the e-discovery publications from The Sedona Conference will immediately download this new edition of The Sedona Principles.  If you are not yet a Sedona disciple, then start with this publication.

Thomas Friedman’s Thank You for Being Late

Thomas Friedman’s 2016 book, Thank You for Being Late, works as a complement to The Sedona Principles (3rd ed.).  You can get the book for $16.80 on Amazon.

Friedman, formerly a New York Times reporter and then columnist, has been a frequent writer on the seismic impacts of technology on our everyday lives.  He is a three-time Pulitzer Prize winner— Thank You for Being Late likely will likely produce his fourth Pulitzer.  In The Lexus and the Olive Tree and The World is Flat, Freidman connected high-technology advancements to the churning state of the world.

In Thank You for Being Late, Friedman makes as much sense as possible of the warp-speed technology developments over last decade and how they are turning lives upside down.  The book’s jacket explains that Friedman “exposes the tectonic movements that are reshaping of the world today and explains how to get the most after them and cushion their worst impacts.”  While jacket promotions are often exaggerated, this fairly summarizes Friedman’s latest work.

In the first 150 pages, Friedman identifies Apple’s 2007 introduction of the iPhone as the inflection point for recent technological changes. Together with advances in silicon chips, software, storage, sensors, and networking, we have a new technology platform which Friedman calls the “the supernova.”

Friedman suggest that since 2007, the pace of change has perhaps become too fast for reasonable adaptation.  In The Sedona Principles (3rd ed.) we have laudable effort to keep pace in the legal world with Freidman’s supernova.

Failure to Use Basic Security Protections when Transferring Electronic Files Results in Waiver of Privilege

The Attorney/Client Privilege and Work Product Protection for a video file transferred via Box.com was lost when a client failed to use basic security precautions.  A February 2017 ruling by a Western District of Virginia magistrate judge in Harleysville Insurance Company v. Holding Funeral Home, Inc. (Case No. 1:15-cv-00057) should reinforce a requirement that lawyers use basic security protections (at a minimum) for all potentially privileged or protected communications.

  1. All Too Common Facts

There are no winners in this case. Both sides of the Harleysville Insurance matter were scolded by the magistrate judge.  In this case, an insurance investigator transferred a video file to its company’s counsel using Box.com, a popular file transfer and sharing service. To notify counsel of the transfer, the investigator sent an email that included the hyperlink to the video file.  Months later, the transmission email was produced in discovery.  Defendants’ counsel spotted and then tested the hyperlink, and immediately found the video file.

It appears from the recitation of the facts that the investigator knew how to use the basic transfer capabilities of Box.com but was never trained or instructed to use even the basic security tools. For example, Box.com allows for the creation of secure folders and the controlled access to any folder.

To make matters worse, the video file resided on the Box.com site accessible by the hyperlink for at least six months.

  1. Attorney/Client Privilege and Work Product Protection Waiver

After the access to the Box.com site and the video file were exposed, Harleysville argued that the defense counsel’s access to the file was an improper, unauthorized access to privileged information, and this should require the disqualification of defense counsel. The argument in response was that Harleysville had waived any claim of privilege or confidentiality by placing the information on Box.com without using any of the available security tools.

Attorney/Client Privilege.  The court analyzed the Attorney/Client Privilege waiver separately from the Work Product Protection issue.  Its first finding was that Harleysville waived any claim of Attorney/Client Privilege with regard to the information posted on Box.com.  The court concluded that “the information uploaded to this site was available for viewing by anyone, anywhere who was connected to the Internet and happened upon the site by use of the hyperlink or otherwise.”  The decision continues, “In essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claim file on a bench in the public square and telling its counsel where they could find it.”

Attorney/Client Privilege issues in the case were governed by state law. Virginia law provides protection for privileged communications. See Walton v. Mid-Atlantic Spine Specialists, 694 S.E.2d 545. 549 (Va. 2010).  But this privilege is an exception to the general duty to disclose and should be strictly construed.   Continuing, the proponent of the privilege has the burden to establish that the Attorney/Client Privilege applies and that the privilege has not been waived.

The Walton case adopts a multifactor analysis for determining whether the holder of a privilege took reasonable steps to prevent disclosure and also took reasonable steps to rectify the error. The first listed factor is “the reasonableness of precautions to prevent inadvertent disclosures.”  Harleysville’s failure to take any reasonable security precautions doomed its argument from the start.

Work Product Protection.  Work Product Protection in this matter was governed by federal law.  The Harleysville Court built its analysis on the Fourth Circuit’s recognition “that the inadvertent disclosure of attorney work product, even opinion work product, can result in a waiver of its protected status.”  This guidance is tempered by additional appellate authority that holds that a waiver should occur only when an attorney’s or client’s actions are “consistent with a conscious disregard of the advantage that is otherwise protected by the work product rule.”

FRE 502(b) would protect an “inadvertent” disclosure.  But the magistrate judge reasoned the disclosure here could not be inadvertent because the investigator clearly intended to transfer the video file to Box.com.  The Court also looked to Rule 502(b)(2), which provides that the disclosure is not a waiver if the holder of the protection “took reasonable to prevent disclosure.”  Again, Harleysville was in a bad place because it failed to take any steps.

The magistrate judge was obviously troubled not only by the transfer of the video file to Box.com without any security precautions, but also by the client leaving the unprotected file on the Internet site for at least six months.  The conclusion followed that this carelessness waived the Work Product Protection.

  1. Sanctions Imposed against Defense Counsel

In the introduction to this Blog post, we noted that both sides were scolded by the Court.  The investigator’s email that included the hyperlink also included a Confidentiality Notice.  This Notice coupled with the obvious significance of the video file was sufficient for the Court to conclude that the defense counsel should not have downloaded and studied the file. The Court wrote, “by using the hyperlink contained in the email also containing the Confidentiality Notice to access the Box Site, defense counsel should have realized that the Box Site might contain privileged or protected information.”

Harleysville argued that the appropriate sanction should be the disqualification of defense counsel. The magistrate judge agreed that there was an ethical stumble, but concluded that the disqualification was an unnecessarily severe sanction. She did, however, order that defense counsel should bear the parties’ costs in obtaining the Court’s ruling on the matter.

  1. Summary and Conclusions

The immediate instruction from the Harleysville magistrate judge’s ruling is that if a party chooses to use a new technology, it will be held responsible for ensuring that its employees and agents understand how the technology works, and, more importantly, whether the technology allows unwanted access by others to its confidential information.   The Box.com facts present a straightforward set of facts—the basic security features of Box.com would, if utilized, have blocked access to the video file.

The case sets the stage for a broader set of responsibilities associated with newer and more sophisticated security technologies.  For example, now that encryption technologies are readily available, should a disclosure that would have been blocked by the use of even simple encryption be deemed a waiver of privileges?   In Harleysville, the Box.com tools were present but not utilized.  In the encryption example, the tools can be acquired and then used, but as of today are probably not widely installed.  But this could change overnight when courts understand that Microsoft has added encryption options to Outlook.   The Harleysville reasoning likely will make it a requirement, not just a recommendation, that lawyers employ encryption for potentially privileged or protected communications.

H/T to Sharon Nelson and the VSB 2017 TechShow for flagging the significance of the Harleysville Ins. Co. v. Holding Funeral Home, Inc. ruling.

Proportionality Redux: The Sedona Conference Revisits its Commentary on Proportionality in Electronic Discovery

When Working Group 1 of The Sedona Conference (Sedona) publishes one of its eDiscovery White Papers, the consequence is often that Sedona steers the development of the law rather than merely reports on developments.  This observation is intended as a compliment, not a criticism. Sedona’s publications have guided the development of eDiscovery law since publication in 2003 of The Sedona Principles; Best Practices, Recommendations & Principles for Addressing Electronic Document Production, and have earned recognition as the gold standard for both the practical and scholarly discussion of eDiscovery issues.

In November 2016, Sedona released its Public Comment Version  of its Commentary on Proportionality in Electronic Discovery (“2016 Commentary”).  This version follows Sedona’s 2010 and 2013 Commentaries on Proportionality and its Fall 2015 publication in The Sedona Conference Journal of Judge Craig B. Shaffer’s scholarly article, “The ‘Burdens’ of Applying Proportionality” (also available for download from Sedona’s website).

This Blog post is not a critique or even a summary of the 2016 Commentary, but serves as a signpost directing litigators to Sedona’s website and the White Paper with the suggestion that the work be a resource for every federal litigator.

The December 2015 Rules Amendments: Key Rules Completely Revamped

The 2016 Commentary reminds us that “Rules 26 (b)(1) and 37(e) were completely revamped in December 2015.”  The amendments are the product of at least five years of  committee work and the most extensive public debate over any rules amendment going back to and probably including the Federal Rules of Civil Procedure introduction in 1938.

For federal court litigators on the front lines, these amendments should carry enormous, almost religious significance.  Chief Justice John Roberts emphasized in his 2015 Year-End Report on the Federal Judiciary that these developments were indeed a “Big Deal.”   See Kurz, J, “The Chief Justice and the Big Deal in the December 2015 Amendments to the Federal Civil Rules,” EDVA Update Blog (February 8, 2016).

The Chief Justice wrote that amended Rule 26(b)(1) “crystallizes the concept of reasonable limits on discovery through increased reliance on the common-sense concept of proportionality.”   Before the amendment, the boundary for the scope of discovery was relevancy.  While for at least three decades federal courts had wrestled with various proportionality considerations embedded in the discovery section of the Federal Rules, the consensus is that proportionality had gained little or no traction for the day-to-day practice of law.  Each time we checked, proportionality slipped deeper into the forgotten fine print of rule subsections and subparts.  With the December 2015 amendment, the discovery scope boundaries are revised to matters “relevant to any party’s claim or defense and proportional to the needs of the case . . .” (emphasis added).  The amended rule then identifies six consideration points.  Proportionality thus moved from the proverbial rule sub-basement (Rule 26(b)(2)(iii)) to the front foyer.

The rule-makers opted in Rule 26(b)(1) not only to elevate proportionality as a discovery touchstone along with relevancy, but seemingly weighted them equally.  This amendment was then paired with the total revision of Rule 37(e), the rule that provides directions for data preservation and spoliation sanctions.   For our coverage of the Rule 37(e) amendment, see Kurz and Mauler, “Proposed Rule 37(e) Cleared by the U.S. Judicial Conference,” EDVA Update Blog (September 29, 2014).  Under these combined rules, a proponent of discovery should now be prepared to defend both the relevancy and the proportionality of requested discovery. Additionally, when conducting a post hoc analysis of preservation decisions, the reasonableness of the preservation should depend in part on proportionality considerations.

Sedona’s 2016 Commentary on Proportionality in Electronic Discovery

The intervening development between the earlier Commentaries and Judge Shaffer’s work and now the 2016 Commentary is the arrival of the December 2015 amendments to Rule 26(b)(1) and Rule 37(e).

The 2016 Commentary revises only slightly the previously published Sedona Principles of Proportionality.  These principles first appeared in the 2010 Commentary. The discussion under each principle is now considerably more robust than in the prior versions. Of course, this is the expected result now that we have the amended rules, the Committee Notes, and nearly a year of case law applying the amended rules.

Some commentators have observed that many practitioners, and even some federal courts, have continued seemingly oblivious to the December 2015 amendments.  This was expected—as we all know, court procedural rules can be mind-numbing, and it will reasonably  take several years for amendments, even highly consequential amendments, to achieve broad effect.  The Chief Justice’s “Big Deal” reminder in his 2015 Report was probably more an effort to accelerate what was otherwise anticipated to be slow change, and not a response to minimally-observed changes on the front lines of litigation.

Sedona’s 2016 Commentary does not admonish either the bar or the bench regarding recognition of the rules amendments.  Rather, the Commentary summarizes the rules amendments, and then works through the six Principles of Proportionality using for the first time a detailed set of 24 Comments.  With each Comment, the Commentary suggests how the new rules can and should work in practice.  For example, under Principle 1 (which addresses proportionality in preservation) in Comments 1.a and 1.b, the language is “proportionality principles may be considered in evaluating the reasonableness of prelitigation preservation efforts,” and “a post hoc analysis of a party’s preservation decisions should [be made] in light of the proportionality factors set forth in Rule 26, and the reasonableness of the preservation parties’ efforts.”  Consistent with Sedona’s practices, the Comments are supported by comprehensive footnotes.

As a second example, the same bridge from Principle to Comments and practical advice can be seen in the discussion of Principle 4 (proportionality decisions should be based on information other than speculation). Comment 4.b directs that “Discovery must be limited if producing the requested information is disproportionate to its likely benefits . . . .”  In Comment 4.c the instruction is that “courts may order sampling of the requested information to determine whether it is sufficiently important to warrant discovery.”

Making Use of Sedona’s 2016 Commentary

Sedona’s White Papers should be a part of every federal litigator’s eDiscovery toolkit.  The White Papers are the preferred starting point to understand the current state of eDiscovery law, to track recent developments, and to appreciate pending or future rules amendments.  Overall, Sedona presents balanced assessments of eDiscovery issues, and provides the best available practical guidance as well as scholarly research and analysis.

We appreciate the practical value of the 2016 Commentary.  This reflects the make-up of the team of lawyers and judges who drafted the Comments. The team members, all respected eDiscovery veterans, include front-line litigators and two federal court magistrate judges.  In many instances, they provide granular, step-by-step recommendations for implementing the Principles.  For this reasons, the Commentary may prove to be especially valuable in resolving many of the eDiscovery challenges that routinely arise in federal court litigation.

The 2016 Commentary, while currently at the Public Comment Version stage, is no exception to the continuing quality of Sedona’s White Papers.  The writers and editors have produced the best available resource on proportionality in eDiscovery, including bringing to date the developments associated with the December 2015 amendments to Rule 26(b)(1) and Rule 37(e).

The Chief Justice and the “Big Deal” in the December 2015 Amendments to the Federal Civil Rules

Why is the Chief Justice of the Supreme Court of the United States proclaiming that the 2015 Amendments to the Federal Rules are a “Big Deal?” He is clearly telling us that the amendments should usher in significant improvements in the civil litigation process. The 2015 Amendments by themselves probably would fall well short of Chief Justice Robert’s assessment, but when the amendments are read together with his 2015 Year-End Report on the Federal Judiciary, the combination certainly looks like a “Big Deal.”

2015 Year-End Report on the Federal Judiciary

Using his 2015 Report to convey his messageChief Justice Roberts writes, “The amendments may not look like a big deal at first glance, but they are.” Since the Chief Justice sits at the top of the legal pyramid, his commentary and admonitions should steer expectations (with other federal judges, at the very least). The 16-page Report, which begins with discussion of the 1838 Codes for Principals and Seconds in dueling, is both easy and necessary reading for every federal litigator even if it delivers a somewhat uncomfortable message to the bench and bar.

The Chief Justice reminds us that the 2015 Amendments are the “product of five years of intense study, debate, and drafting to address the most serious impediments to just, speedy, and efficient resolution of civil disputes.” This is more than a congratulatory pat on the back for the rule makers. The Committee members and many participants appreciated that the federal courts were in need of an overhaul, and they were determined to deliver meaningful improvements.   The process spanned five years because the task was both huge and critically important, and that process required careful steps and broad participation.

Amendments to Rule 1 and Rule 26(b)(1)

While the 2015 Amendments are a package of rule changes, this Blog posting considers just the 8-word expansion of Rule 1 and the revised and relocated proportionality language now in Rule 26(b)(1). This limited coverage, however, confirms the Chief Justice’s message that the 2015 Amendments can be, in fact, the “Big Deal.” But it’s not tweaks to the rules alone that will initiate meaningful improvements in the litigation process. The Chief Justice saying the rules mandate cooperation among the parties and the court, and his instruction to the federal judiciary to become actively involved in setting the scope of discovery, propels the implementation of the intended improvements.
At the beginning of the Report, the Chief Justice discusses Rule 1:

Rule 1 directs that the Federal Rules “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” The underscored words make express the obligation of judges and lawyers to work cooperatively in controlling the expense and time demands of litigation—an obligation given effect in the amendments that follow. [Emphasis in original Report]

So that we do not glide by the newly added eight words without absorbing their meaning, the Chief Justice instructs “[t]he underscored words make express the obligation of judges and lawyers to work cooperatively in controlling the expense and time demands of litigation—an obligation given effect in the amendments that follows.” If cooperation was a distant objective before, it’s now embedded in the Federal Rules.

Our attention next turns to the proportionality amendments in Rule 26(b)(1). Chief Justice Roberts there explains, “Rule 26(b)(1) crystallizes the concept of reasonable limits on discovery through increased reliance on the common-sense concept of proportionality.” He quotes the amended rule:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.

Appreciate how the amended rule differs from before. The scope of discovery had been “any matter relevant to the subject matter involved in the action.” The new scope boundaries are substantially reduced to matters “relevant to any party’s claim or defense and proportional to the needs of the case . . .” Also, the proportionality language is relocated from the proverbial basement (previously Rule 26(b(2)(c)(iii)) to the front foyer (Rule 26(b)(1)) so that proportionality can no longer be treated as an afterthought, or perhaps given no thought at all.

The “Big Deal”

Justice Roberts goes beyond reciting the reworded and somewhat expanded rules. To bring genuine improvement to the civil litigation process, he explains, “The key here is careful and realistic assessment of actual need.” If the Report stopped here, then the 2015 Amendments might bring about just a shuffling of papers with new but meaningless reports. Opposing counsel probably can only rarely reach agreement on “actual need” no matter how sternly a court demands that they meet and confer, even if they must meet multiple times.

The Chief Justice continues, “[t]hat assessment may, as a practical matter, require the active involvement of a neutral arbiter—the federal judge—to guide decisions respecting the scope of discovery.” This is it. Rule 1 dictates that “the court and the parties” be involved, and, according to the Chief Justice, it is the “obligation of judges and lawyers to work cooperatively . . .” And the Chief Justice calls for the “active involvement” of federal judges in setting the “scope of discovery.” While it is a big deal for the Chief Justice to admonish attorneys that they must “work cooperatively” with their opposition, and it is an even bigger deal for the Chief Justice to instruct the federal judiciary that it’s time for them to come down from the bench, roll up their sleeves, and become actively involved in core discovery issues at the early stages of a matter.

In an interesting development, the Washington Post concurred with the Chief Justice. It’s not often that legal rule amendments are fodder for newspaper editorials; when the news media weighs in on legal procedure, it’s usually because the developments are a Big Deal (or some horribly botched process). While the Post editorial page may not be persuasive legal precedent, there is common sense relayed in the editorial:

Some in the legal world warn that these changes are unnecessary and potentially counterproductive, limiting access to valuable information. But there is no good argument against insisting that lawyers’ requests be proportionate. Judges will have to make sure the spirit of these reforms is respected.

Chief Justice Roberts might disagree with one point in the editorial. His message to the bench and bar is that the changes are more than the mere “spirit of these reforms”.  Instead, the duties and obligations are, in fact, now embedded in the Federal Rules.

In sum, those who downplayed the 2015 Amendments to the Federal Rules as technical adjustments that would have only minimal impact on day-to-day practice should think again.  Chief Justice Roberts, drawing on the amendments and employing his position as the Chief Justice of the Supreme Court of the United States, announced that there is an “obligation of judges and lawyers to work cooperatively” and that federal judges should be actively involved in setting the scope of discovery.  Moreover, these duties and obligations are now embedded in the Federal Rules. This is, truly, a Big Deal.

Is the Specter of New Rule 37(e) Influencing District Courts in Spoliation Rulings?

We have written multiple times on the EDVa Update Blog about the Court’s handling of spoliation claims. Recently we covered the 4th Circuit’s remand of a District Court ruling applying an adverse inference following a failure to preserve certain evidence.  We have also written on the workings of amended Fed. R. Civ. P. 37(e).  With sweeping changes ahead with the amendment to Rule 37(e) (effective date: December 1, 2015), the Court’s analysis of spoliation claims and associated sanctions will undergo major changes.

The Eastern District’s 61-page opinion in Integrated Direct Marketing, LLC v. May & Merkle, Inc., Case No. 1:14-cv-1183 (E.D. Va. Sept. 8, 2015), is likely one of the last pre-Rule 37(e) amendment spoliation rulings we will see. In this case, the ruling is consistent with the analysis that will soon apply, but the District Court in the case took a very different route to get to the same place. Even though the record included substantial evidence of ESI spoliation, the Court based its ruling on its finding of false statements in an affidavit, which allowed it to side-step the current legal swamp on spoliation.

IDM Case Posture: Summary Judgment and Spoliation Arguments

The IDM case presented an unfortunate but common fact pattern.   It is alleged in the pleadings that Drew May, an Executive Vice President at IDM, was pushed out of the company.   As he left, he allegedly downloaded a large number of IDM’s electronic documents to an external hard drive. May then signed on as new vice president at Merkle, a competitor to IDM.   While IDM was threatening suit, the former VP allegedly deleted (on the day before the filing of the Complaint) many of the IDM documents that he allegedly downloaded to his external hard drive. The deletion activity allegedly continued for the next couple weeks. Since the VP knew of the credibly threats of a lawsuit, there was a duty preserve relevant ESI and documents.

IDM sued in the Alexandria Division of the Eastern District on multiple counts. The lead claims were for trade secrets misappropriation, breach of fiduciary duty, beach of a confidentiality agreement, and conversion. The discovery quickly turned to the ESI on the VP’s external hard drive.

IDM retained Craig Ball, a nationally-known eDiscovery attorney and forensic investigator to examine the VP’s external hard drive.  Ball uncovered the VP’s conduct and identified more than 500 deleted IDM documents. Ball’s work also identified incriminating dates of the VP’s alleged deletions.

After a prolonged discovery war, both defendants moved for summary judgment arguing that there were no trade secrets involved and there had been no misappropriation. Defendant Merkle was apparently able to distance itself from the VP’s conduct; the Court granted Merkle’s motion on all counts.

The VP’s defense was complicated by the spoliation and false statement issues. The Court’s opinion notes that relevant evidence was not truly lost, and in fact, had been recovered. The Court was nonetheless troubled by the conduct, which included false statements in an affidavit submitted to the Court. IDM’s substantive case, however, was deteriorating. It faced an added hurdle that its designation of experts came late, and the Court had barred the damages experts from testifying—a huge problem in proving IDM’s $46 million claimed damages.

In its post-discovery pleadings, IDM emphasized the evidentiary spoliation and the VP’s false statements, and it targeted the most severe spoliation sanctions—striking of defenses and/or an adverse inference instruction to the jury.

The District Court‘s solution in its rulings was to veer away from spoliation and to focus on the false statements in the VP’s affidavit. Curiously, the Court concluded that since the forensic work led to the recovery of the deleted ESI, there was “insufficient evidence to support a finding of spoliation.” In its remedy, the Court avoided the draconian sanctions requested by IDM, but imposed stiff financial sanctions against the VP.

The VP’s motion for summary judgment was granted on all but the conversion counts, but the Court ordered him to pay a portion of IDM’s attorney’s fees plus the forensic expert’s bill.

Influence of Rule 37(e)’s Upcoming Arrival?

The District Court’s ruling comes under the current rules and case law. In 10 weeks, however, amended Rule 37(e) will be effective, and the requisite analysis will shift. The coming rule will limit the Court’s inherent authority to impose spoliation sanctions (instead, authority will come from the new amended Rule), will structure the factual and legal analysis, and will direct turning away in most situations from the draconian sanctions and towards remedies that are not outcome determinative. Hopefully, what is currently a legal swamp will disappear, and District Courts will then see have a clearer analytical path and predictable sanctions.

Notwithstanding the District Court’s conclusion that there was insufficient evidence to support a finding of spoliation (the findings suggest egregious spoliation but not real prejudice to IDM), it appears that IDM had a serious argument that the VP’s conduct supported striking his defenses or giving IDM an adverse inference instruction. Even under the upcoming new Rule 37(e) provisions, the VP’s spoliation arguably could support the imposition of the requested draconian sanctions. But the new Rule and the accompanying Committee Note state a preference for the alternative yet less-severe sanctions.

The IDM Court arrived at a solution that would be consistent with the coming rule. But the Court arrived at this result by a very different route.   The lengthy opinion side-stepped entirely the spoliation issue, and thereby avoided the current legal swamp. Instead, the Court grounded its ruling on the VP’s submission of a false affidavit.   This is an understandably safe route, but an unnecessary path after December 1, 2015 under the new Rule 37(e).

Fourth Circuit Reverses Spoliation Sanctions: Case Remanded to District Court for Additional Findings

In a March 31, 2015 unpublished decision, the Fourth Circuit reversed and remanded the damages portion of an oral contract case decided by the Alexandria district court.  The opinion highlights the difference between a duty  to preserve all documents once there is a reasonable anticipation of litigation as opposed to a duty “to preserve documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”

The Case Facts: A Failure to Preserve and the Resulting Adverse Inference Instruction

The case, Blue Sky Travel et al. v. Al Tayyer Group, No. 13-2500 (4th Cir. Mar. 31, 2015), involved an oral contract for a US-based travel company to purchase airline tickets for a Saudi entity working for the Ministry of Higher Education of Saudi Arabia.  The front-end of the case focused on the oral contract and the statute of frauds.  The district court decided that the statute of frauds did not apply, and the Fourth Circuit affirmed this part of the decision.  However, the Fourth Circuit reversed on a spoliation instruction that influenced the damages part of the case.  The damages argument centered on an adverse inference instruction that followed the magistrate judge’s determination that defendant ATG spoliated evidence.  Specifically, it appeared that ATG either destroyed or failed to preserve invoices of its dealings with other vendors who also sold airline tickets to ATG. The district court awarded $10 million in damages to Blue Sky Travel for lost profits.

In the discovery phase of the case, the magistrate judge ordered ATG to produce a series of ATG’s 3rd party invoices. ATG failed to do this even after three orders.  It eventually surfaced that the invoices no longer existed.  The magistrate judge’s recommendation to the district court was for an adverse inference instruction as a sanction for the spoliation.  The sanction was appropriate, the magistrate judge concluded, “to address effectively the prejudice caused by defendant’s failure” to preserve.  The district court affirmed the sanction order for the reason given by the magistrate judge, namely the prejudice from the spoliation of evidence.

The magistrate judge had held that once litigation began, ATG had a duty to stop its document destruction policies “and to preserve all documents because you don’t know what may or may not be relevant” (emphasis added in appellate opinion).  The Fourth Circuit held that this is too broad a duty; a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.”   The Fourth Circuit determined that the spoliation finding and sanction were an abuse of discretion because the action was based on an erroneous principle of law.

At trial, by agreement between the parties, the lost profits component of damages was decided by the district judge, not by the jury.  The district court treated the adverse inference instruction as “an evidentiary presumption applicable to the damages hearing.”

The Fourth Circuit’s Holding, Reversal in Part, and Instructions on Remand

The Fourth Circuit’s reversal is grounded on the difference between a duty to preserve all documents once there is a reasonable anticipation of litigation as opposed to a duty “to preserve documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.“   The Opinion recites the current Fourth Circuit law:

A party may be sanctioned for spoliation if the party (1) had a duty to preserve material evidence, and (2) willfully engaged in conduct resulting in the loss or destruction of that evidence, (3) at a time when the party knew, or should have known, that the evidence was or could be relevant in litigation.

Opinion at 21 (citing Turner v. United States, 736 F.3d 274, 282 (4th Cir. 2013)).

The Turner case dealt with the United States Coast Guard’s role in a tragic boating accident.  The plaintiff sought copies of audio tapes of Coast Guard communications during a search and rescue operation.  The Coast Guard did not preserved the tapes.  A claim of negligent spoliation followed.  The Fourth Circuit held that spoliation does not result from negligent conduct, and it restricted the preservation duty to evidence “relevant to some issue in the anticipated case.” The court in that case wrote:

[S]poliation does not result merely from the “negligent loss or destruction of evidence.” Rather, the alleged destroyer must have known that the evidence was relevant to some issue in the anticipated case, and thereafter willfully engaged in conduct resulting in the evidence’s loss or destruction.

Turner v. United States, 736 F.3d 274, 282 (4th Cir. 2013) (internal citation omitted).

Based on the appellate record in Blue Sky Travel, the Fourth Circuit was unable to determine whether ATG had a duty to preserve the 3rd party invoices.  Judge Keenan observed that:

In the present case, neither the magistrate judge nor the district court made the crucial finding whether ATG destroyed or failed to preserve the evidence at issue, despite having known or should have known that the evidence could be relevant in the case.

Opinion at 21 (citing Silvestriv. General Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001); Turner, 736 F.3d at 282).

On remand, the Fourth Circuit directed the district court to answer two unresolved questions:

  • First, the district court should ascertain the date by which ATG knew or should have known that invoices relating to other vendors could be relevant in the case.
  • Second, the district court should establish when ATG destroyed the invoices from the other vendors.

 A Different Analysis under Proposed Fed. R. Civ. P. 37(e)

Blue Sky Travel confirms the current Fourth Circuit position on the duty to preserve. Beyond this, the case has little or no precedential value on spoliation issues and related sanctions.  First, it is only an unpublished decision, which the Fourth Circuit reminds us is not binding precedent.  But apart from this designation, the case facts may soon be governed by proposed FRCP Rule 37(e), which would likely dictate at least a different track at the trial level. Following that track, the magistrate would have more guidance on the necessary findings and the available remedies or sanctions.

Proposed Rule 37(e) (to be effective December 1, 2015) requires a party take “reasonable steps” to preserve ESI.  This seemingly limits the duty to preserve to relevant ESI and documents.  Moreover, the preservation duty should be viewed as proportional to the issues in the case and the dollars at stake.  Again, this dictates against an overly broad preservation duty (i.e., against a knee-jerk “all documents” approach) and directs the inquiry back to what is relevant.  As to the sanction, the key finding in the case was of “prejudice” to the plaintiff because of ATG’s spoliation, leading to an adverse inference instruction.  Under the proposed Rule 37(e), an adverse inference instruction may not be based on a finding of only prejudice, but requires a finding of an “intent to deprive” the opposing party of the use of the missing documents.  (Proposed Rule 37(e) applies to ESI only, so it would not cover physical copies of the invoices.  But if the invoice copies were scanned into electronic form, then the Rule would apply.)

The Fourth Circuit split 2-1 on the statute of frauds issue, but it was seemingly unanimous on the spoliation question.  The Appellant has petitioned for rehearing en banc, so practitioners should stay tuned for any further developments in this case

RPB News: Dan Mauler to Participate in Distinguished e-Discovery Panel

We take pleasure in announcing that Dan Mauler will join a distinguished panel on March 26, 2015 to discuss the topic of “Obtaining and Admitting Electronic Evidence in Federal Courts.”  Mr. Mauler will join U.S. Magistrate Judge John M. Facciola, U.S. District Judge Liam O’Grady, and U.S. Magistrate Judge J. Mark Coulson as members of the panel.  The event will be held at the E. Berrett Prettyman Federal Courthouse, 333 Constitution Avenue, NW, in Washington DC, beginning at 3:00pm on the Sixth Floor.  The event is sponsored by the Federal Bar Association on the occasion of the national organization’s mid-year meeting.  Attendance is open to both FBA members and the general public. Please click here for additional information.

Mr. Mauler focuses his practice on commercial litigation and appeals with an emphasis on electronic evidence / electronic discovery issues.  He is a founding member of the EDVA Update Blog, which focuses on the U.S. District Court for the Eastern District of Virginia.

Proposed FRCP Rule 37(e) Cleared by the U.S. Judicial Conference

[This Blog post is an abbreviated version of an article published in the Fall 2014 Edition of the Northern Virginia Chapter of the Federal Bar Association’s Rocket Docket News and also available on the Redmon Peyton & Braswell LLP website here.]

The U.S. Judicial Conference has approved proposed FRCP Rule 37(e). The rule now goes to the U.S. Supreme Court. If the Court approves the changes before May 1, 2015, and Congress leaves the proposed amendments untouched, the amendment will become effective December 1, 2015.

The proposed rule presents a uniform process and standard which will resolve the split among the circuits on the availability of the most serious ESI spoliation sanctions. Proposed Rule 37(e) will replace entirely the current subpart, and, as stated in the Committee Note, “forecloses reliance on inherent authority or state law to determine when certain [curative or sanctioning] measures should be used.” The new standard will permit the most serious sanctions only when there is proof of “intent to deprive” the harmed party of the use of the ESI in its case.

This blog post outlines the workings of the proposed rule. Given the complexity of the challenge, the rule is surprisingly simple.

First, rather than generally dealing with lost evidence, the proposed rule addresses only lost ESI and applies only if a 3-part test is met. Second, if there is a finding of prejudice because the ESI has been lost, then a court may impose remedies to cure the prejudice, but no more. And third, the most serious remedies (including case dismissal and giving an adverse inference jury instruction) may only be utilized after a finding of “intent to deprive” the use of the lost ESI.

Rule 37(e) decision tree - wordpress1.    When Does the Rule Apply? The 3-Part Test.

The rule starts with the 3-part test:

a.    ESI Preservation Duty and Trigger. The inquiry begins with the preservation trigger event—the proposed rule applies only to ESI “that should have been preserved in the anticipation or conduct of litigation…” The Committee Note confirms that this does not create a new duty to preserve, but draws on the existing common law duty:

Committee Note:  Many Court decisions hold that potential litigants have a duty to preserve relevant information when litigation is reasonably foreseeable. Rule 37(e) is based on this common-law duty; it does not attempt to create a new duty to preserve. The rule does not apply when information is lost before a duty to preserve arises.

b.    Reasonable Steps to Preserve.   The proposed rule next limits its application to ESI that was lost “because a party failed to take reasonable steps to preserve the information . . .” The Committee Note explicitly identifies that only “reasonable steps” should be required:  “This rule recognizes that “reasonable steps” to preserve suffice; it does not call for perfection.”

In practice, the pursuing party will show that ESI has been lost, and that the other party was on notice to preserve. The defense then likely centers, as least initially, on the preservation steps taken. If the defending party demonstrates that it took reasonable steps to preserve ESI, then the spoliation claim should fail. The Committee Notes then adds proportionality as a “factor in evaluating the reasonableness of preservation efforts is proportionality.”

The Committee Note also recognizes that the party’s sophistication should be considered when a court analyzes whether a party realized what should have been preserved.

c.    Will Curative Measures Remedy the ESI Loss?   A court should not go any further in the analysis if the ESI loss can be “restored or replaced through additional discovery.”  The Committee Note repeats this point:

Committee Note:  Rule 37(e) directs that the initial focus should be on whether the lost information can be restored or replaced through additional discovery…If the information is restored or replaced, no further measures should be taken.

In many ESI cases, this third part will end the inquiry. ESI that may appear to be lost can often be located elsewhere. Before a court explores prejudice and searches for appropriate remedies, it must consider the possibility that seemingly-lost ESI can be restored or replaced.

2.    If there is a Finding of Prejudice, what may a Court Order?

Under the proposed rule, only when the 3-part test above is met does a court continue with its analysis. The question in subpart (e)(1) of proposed Rule 37(e) is whether there is a “finding of prejudice.” If so, then a court may reach into its bag of remedies, but is limited to “order[ing] measures no greater than necessary to cure the prejudice.” The remedies available at this stage do not include the most serious sanctions –the adverse inference jury instruction or dismissal. Those sanctions may be imposed only under subpart (e)(2).

The Committee Note emphasizes that the proposed rule is purposefully vague on which party has the burden of proving or disproving prejudice.

Committee Note: The rule does not place a burden of proving or disproving prejudice on one party or the other.

As to the available remedies, the Committee Note provides:

Committee Note: The rule leaves judges with discretion to determine how best to assess prejudice in particular cases.

The available remedies are not listed in the proposed rule, but case law identifies financial penalties, payment of attorneys’ fees, evidentiary limitations, and that certain facts are deemed proved. A close reading of the proposed rule and the Committee Note identifies these actions as remedies, not “sanctions.”

3.  A Court may Order the Most Serious Remedies only after a Finding of “Intent to Deprive” the Use of the ESI.

The center of the ongoing debate has been the required showing before a court may order the most serious remedies:  an adverse inference jury instruction, dismissal of claims, or a default judgment. Some courts have required proof of black-hearted destruction of ESI, while the Second Circuit has authorized giving an adverse inference instruction based on a mere finding of negligence or gross negligence. The rule-makers intend a uniform national standard, and they reject the Second Circuit’s approach.    

Committee Note:  It is designed to provide a uniform standard in federal court for the use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse-inference instructions on a finding of negligence or gross negligence.

The chosen test centers on proof of “intent to deprive.” The proposed rule language reads: “only upon a finding that the party acted with the intent to deprive another party of the use of the information in the litigation.”  f there is any confusion in this language, the Committee Note emphasizes the restriction:

Committee Note: Subdivision (e)(2) limits the ability of courts to draw adverse inferences based on the loss of information in these circumstances, permitting them only when a court finds that the information was lost with the intent to prevent its use in litigation.

Only if this hurdle is cleared does the door open to the serious sanctions.

In conclusion, the proposed amendments to Fed. R. Civ. P. 37(e) are intended to apply a uniform standard in federal courts regarding a party’s obligation to preserve ESI and the remedies available to the court when ESI is lost. The remedies are intended to be remedial, rather than punitive, and the most serious remedies are reserved to instances where dark-hearted intent is shown.

Before Receiving Spoliation Sanctions, a Party Must Demonstrate Prejudice

In a recent decision, Magistrate Judge Ivan D. Davis of the U.S. District Court for the Eastern District of Virginia denied a spoliation motion aimed at a corporate defendant using a new formulation of necessary legal elements.  In Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools and Colleges, 1:12-cv-00911, the plaintiff argued that a telephone call from the plaintiff’s lawyer nine months prior to the filing of the Complaint triggered the defendant’s duty to suspend its regular document retention policy and institute a litigation hold.  After a full-day evidentiary hearing, including expert witness testimony, Judge Davis rejected this argument and instead noted that a mere “conditional threat of litigation” expressed over the telephone, coupled with the plaintiff’s failure to send a written litigation hold letter to the defendant, did not put the defendant on notice of potential litigation.

Judge Davis’s opinion is a useful reminder to practitioners:  Send a written litigation hold letter after any telephone conversation if you anticipate asserting a spoliation claim down the road.  While what is said during a telephone call can be disputed and is subject to the vagaries of memory, a written letter is definite and inexpensive.  (Of course, be careful that your own client has properly initiated its own litigation hold before you announce that “litigation is reasonably anticipated.”).

Judge Davis’s opinion is also noteworthy for his legal analysis.  In addition to finding that the defendant had no duty to initiate a litigation hold prior to receiving the complaint, Judge Davis made the alternate finding that the plaintiff suffered no prejudice from the operation of the defendant’s document retention policy.  While the opinion does not expressly say so, it appears that Judge Davis followed the reasoning of Judge Paul Grimm, a leading e-Discovery jurist from the Federal trial bench in Maryland, and his influential opinion in Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.d. 497 (D. Md. 2010).  In that case, Judge Grimm set forth three elements necessary to warrant spoliation sanctions: 1) a triggered duty to preserve documents or evidence, 2) destruction of relevant evidence accompanied by a “culpable state of mind,” and 3) prejudice resulting to the other party.

This is a subtle yet significant extension (or perhaps modification) of the Fourth Circuit’s controlling spoliation case law, Silvestri v. Gen. Motors Corp., 271 F.3d 583 (4th Cir. 2001).  Silvestri is nearly 13 years old, and the case did not involve the destruction of electronic or digital evidence.  Further, Silvestri states that spoliation sanctions could be ordered under two alternative situations: either that the spoliator’s conduct was sufficiently egregious or the effect of the spoliator’s conduct was sufficiently prejudicial.  Contrast that with Victor Stanley where a party must show all three elements (including prejudice) to warrant an order of spoliation sanctions.  In today’s modern e-Discovery era, Victor Stanley offers better guidance for practitioners than Silvestri, and it appears that Judge Davis finds Victor Stanley persuasive and useful in the e-discovery context.

Spoliation claims against institutional or corporate defendants are becoming more frequent, especially in high-stakes, aggressive litigation.  It is easy to see why:  a successful spoliation motion that leads to an adverse inference jury instruction can be a death knell for a corporate defendant.  It is critical for plaintiff’s counsel to adequately prepare for future spoliation claims through litigation hold letters and early Rule 30(b)(6) depositions of corporate representatives.  On the flip-side, defense counsel should argue the Victor Stanley three-element requirement when defending against spoliation claims.

A copy of Judge Davis’s opinion is available here.

Disclosure:  Redmon, Peyton & Braswell, LLP served as counsel of record for Defendant Accreditation Alliance of Career Schools and Colleges in this case.

Fourth Circuit Blesses Use of Forensic Image to Examine Data

The U.S Court of Appeals for the Fourth Circuit recently approved the use of a forensic “mirror” image of a laptop computer in order to examine its contents. While such use of a forensic image is common in the e-Discovery industry, this recent case represents formal approval by one of the most significant appellate courts in the United States, and is binding precedent upon trial courts in the Eastern District of Virginia.

U.S. v. Stanley, __ Fed. Appx. __, No. 12-4572, 2013 WL 3770713 (4th Cir. July 19, 2013), was a criminal case resulting from an investigation that uncovered child pornography on the defendant’s computer. During trial, the Government presented expert testimony of a law enforcement agent who specialized in computer forensics. During voir dire examination of the agent prior to qualification, the agent testified extensively about the process she used to examine the defendant’s laptop. She testified that she used a software program called “EnCase” to make a forensic image of the defendant’s laptop. She then examined the forensic image rather than the original laptop, according to the Fourth Circuit’s opinion, so as to avoid “risking damage to the original” data.

The agent then testified that her review of the forensic image uncovered a peer-to-peer file sharing progam called FrostWire, and that this program had been used to search for, download, and share child pornography. The Fourth Circuit’s opinion accepts without further comment that the data found in the forensic image is also present on the defendant’s original laptop, and that the defendant’s guilty verdict can be amply supported by the forensic image.

During voir dire of the agent, the defense unsuccessfully attempted to exclude her as an expert witness. The Fourth Circuit affirmed the agent’s qualification as an expert, noting that the district court acted well within the “wide bounds of its discretion” under the Fed. R. Evid. 702 and the Daubert analysis. The court also recognized that the “process of forensic data extraction requires specialized knowledge or skill conducive to expert testimony.” The court then went on to review the voir dire examination of the agent, noting that it was lengthy and included several rounds of cross-examination which covered the agent’s education, training, experience, knowledge of the forensic tools, procedures utilized, as well as “detailed explanations of her use of the forensic software in this particular case.” Finally, the court noted the agent’s testimony that the “forensic tools she used to examine the contents of [the defendant’s] laptop had been accepted as reliable procedures by her law enforcement agency.” Taken in total, the Fourth Circuit found this more than sufficient to support the agent’s qualification as an expert.

Practitioners can read Stanley as the Fourth Circuit’s affirmation of the use of forensic images in data preservation. Making a forensic image of a single laptop or desktop computer is relatively inexpensive, and many e-Discovery vendors can perform the operation within a single day and for an expense between $300 – $1,000. The vendor then usually provides a copy of the image to counsel on an external hard drive. Counsel can simply connect the hard drive to a desktop computer via a USB connection, and browse through the hard drive using normal Windows system tools. Counsel need not worry about altering the metadata of the forensic image during this review because the e-Discovery vendor will maintain a “master” image which can be reproduced multiple times in the future with unaltered metadata. Considering the relatively low-expense, an early forensic image of computer data should be made if there is any suggestion that the data will become evidence in court or produced in discovery.

Please note:  This blog/Web site is made available by the firm of Redmon, Peyton & Braswell, LLP (“RPB”) solely for educational purposes to provide general information about general legal principles and not to provide specific legal advice applicable to any particular circumstance. By using this blog/Web site, you understand that there is no attorney client relationship intended or formed between you and RPB. The blog/Web site should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you.