In the second issue of Seyfarth eDIGital, Seyfarth Shaw’s eDiscovery and Information Governance practice group newsletter, we will explore Orbit One Communications, Inc., et al. v. Numerex Corp.,1 a recent e-discovery decision out of the Southern District of New York that is particularly noteworthy for its departure from Judge Scheindlin’s influential decision in Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities LLC, et al.2

In Orbit One, Magistrate Judge James C. Francis IV addressed a wide range of e-discovery topics, including the necessity of issuing a written litigation hold, the threshold for imposing sanctions, and the applicability of reasonableness and proportionality principles. The opinion also employed a novel “who-what-when-how” framework for breaking down the duty to preserve and coined two new terms—assistive relevance and discovery relevance—in order to help define the hurdles to establishing a sanctions-worthy e-discovery offense. Finally, by “respectfully disagree[ing]” with elements of Judge Scheindlin’s holding in Pension Committee, Orbit One serves as a reminder that given the absence of appellate court guidance on most e-discovery issues, individual judges have little binding precedent to guide them and therefore are free to approach e-discovery disputes with virtual autonomy.

Factual Background

As is often the case when a court confronts an e-discovery dispute, the devil is in the factual details, and this dispute is no exception. In 2000, Plaintiff David Ronsen established Orbit One, a corporation focused on the sale and use of satellite communications services. While at Orbit One, Ronsen utilized both a laptop and desktop computer, on which he had access to an email server and to a shared file server. Certain folders on the “laptop and desktop were ... synchronized with the shared drive on the server.” The servers were backed up to disk on a two-week rotation; two other disks were used for monthly and yearly backups.

On July 31, 2007, satellite communications company Numerex successfully acquired the majority of Orbit One’s assets and transitioned Orbit One into a new division of Numerex. Ronsen became President of this new division, and two other Orbit One executives, Scott Rosenzweig and Gary Naden, also made the move to Numerex. Shortly thereafter, in August 2007, Naden’s former employer Axonn threatened to sue Orbit One for alleged misappropriation of Axonn’s intellectual property and demanded the preservation of documents relevant to those allegations. On August 27, 2007, an attorney Ronsen had consulted orally advised him to retain relevant information, and on September 17, 2007, emailed a litigation hold to Ronsen, Rosenzweig, and Naden. At around the same time, Orbit One’s IT administrator, unaware of the litigation hold, requested that Ronsen remove data from the servers in order to increase free storage space and improve computer performance. In response, Ronsen archived over 6 gigabytes of data onto an external hard drive, 80% of which Ronsen described as having no relation to Numerex, the acquisition, or Orbit One’s business, with most of the remainder predating the acquisition. In order to comply with certain computer security protocols, the IT administrator also requested that Ronsen remove his desktop from the network and use only the laptop. Ronsen took the desktop home and had an independent computer technician “cannibalize the best components” from three computers he owned in order to build one, high-powered computer; the technician retained the unused components.

As part of the Numerex acquisition, Orbit One was entitled to payments based upon the new division’s satisfaction of certain performance benchmarks. Ronsen consulted with outside counsel regarding his belief that Numerex was impeding his ability to do his job and satisfy these performance benchmarks, leading to the filing of a lawsuit against Numerex on January 7, 2008. Three weeks later, Numerex sent plaintiffs’ counsel a comprehensive document preservation demand letter. In response, the aforementioned IT administrator removed several backup disks from rotation; Ronsen later took those backup disks home.

Despite initiating litigation against his employer, Ronsen remained a Numerex employee until resigning in April 2008. Prior to departing, Ronsen reported technical issues with his laptop to the IT administrator, who replaced the hard drive and “synched the laptop to the shared drive so that the laptop acquired Mr. Ronsen’s files.” After leaving Numerex, Ronsen returned the backup disks he had taken home, and asked the IT administrator to re-enable a forwarding rule Ronsen had previously used to receive his work email on a personal Yahoo account. The IT administrator eventually disabled the forwarding rule, but not before Ronsen received and deleted approximately 200 such emails. Rosenzweig and Naden left Numerex soon after Ronsen, in July 2008, and separately sued Numerex for imposing allegedly overbroad covenants not to compete.

Numerex subsequently asked the court to grant an adverse inference jury instruction against Orbit One and Ronsen as a result of their alleged spoliation of electronically stored information (“ESI”).

Preservation Deconstructed

The court began by identifying the three elements Numerex had to establish to obtain an adverse inference for spoliation under prevailing Second Circuit law (one of the few areas in which the circuit courts have spoken): (1) that Orbit One had an obligation to preserve the destroyed evidence at the time it was destroyed; (2) that evidence was destroyed “with a culpable state of mind”; and (3) that the destroyed evidence was “relevant” to Numerex’s claims or defenses.3 The court focused its attention on the third prong of this test in finding that no sanctions were warranted.

While Magistrate Judge Francis agreed with Judge Scheindlin’s seminal opinion in Zubulake v. UBS Warburg LLC4 that a party's preservation obligation involves an analysis of when the duty to preserve arises and what evidence must be perserved, he made clear that two additional questions were pertinent to the inquiry: "how must a party go about fulfilling its ultimate obligation, and who is responsible for seeing that it is fulfilled?" We would suggest that a fifth issue, where the evidence is located (e.g., in whose possession, custody, or control, and on what medium) should also be considered by any party evaluating its preservation obligations.

1. When

As noted in numerous other cases, the court found that the “preservation requirement arises when a party reasonably anticipates litigation.”

2. What

The court noted that “a party is well-advised to retain all relevant documents (but not multiple identical copies) in existence at the time the duty to preserve attaches,” and confirmed that “relevant” in this context referred to discovery relevance, which, as discussed below, is quite broad. The court explained that what constitutes an “identical” copy may not always be apparent, but counseled parties to preserve, “if not all copies of the document, at least the data (or, more precisely, the metadata) identifying the recipients.” While the court took note of recent jurisprudence touting the related concepts of reasonableness and proportionality as influencing the scope of parties’ preservation obligations,5 Magistrate Judge Francis opined that such principles "may prove too amorphous to provide much comfort to a party deciding" what ESI to preserve and "cannot be assumed to create a safe harbor for a party that is obligated to preserve evidence but is not operating under a court-imposed preservation order."

3. How

The court in Orbit One outlined four steps that a party must take in order to satisfy its preservation obligations:

  • Implement a litigation hold and suspend any routine document destruction policies pertaining to such information;
  • Ensure that all sources of potentially relevant information are identified and placed “on hold”;
  • Take affirmative steps to monitor compliance; and
  • Continue preservation of potentially relevant information throughout the discovery process.

The court highlighted a split in the case law concerning whether a party may “downgrade” the format in which it preserves ESI from a more accessible medium (e.g., active files) to a less accessible medium (e.g., backup tapes), but described the split as “more semantic than real” since even those decisions that declined to sanction such downgrading nevertheless insisted that the downgrading party incur all costs associated with reinstating the accessibility of the ESI.

4. Who

The court noted that counsel has the initial duty to advise the client regarding the necessity of preserving relevant documents and what sorts of documents would be relevant to the litigation. While the court also stated that counsel “must take affirmative steps to monitor compliance” with the litigation hold, Magistrate Judge Francis indicated that if “the client is a business, its managers, in turn, are responsible for conveying to their employees the requirements for preserving evidence.” It should not be surprising to find some uncertainty as to when responsibility rests with the party versus its counsel; depending on the circumstances, both the parties to a litigation and their counsel may be subject to sanctions for e-discovery violations, and so as the court advises, “attorneys and clients must work together to ensure that both understand how and where electronic documents, records, and emails are maintained and to determine how best to locate, review, and produce responsive documents.”

Defining Relevance

After reconfirming that in the Second Circuit, a “culpable state of mind” for purposes of a spoliation inference includes ordinary negligence, the court perhaps made its greatest contribution to the body of e-discovery jurisprudence by bifurcating “relevance” into the separate concepts of “assistive relevance” and “discovery relevance.”

1. Assistive Relevance

In order to justify the imposition of sanctions, the court held that the lost evidence must have had assistance relevance, which requires a showing that the destroyed evidence would have been favorable, i.e., of assistance, to the party seeking sanctions. Destruction of evidence in bad faith or through gross negligence is sufficient to support the inference that the lost evidence would have been helpful to the moving party. In the absence of bad faith or gross negligence, however, the court enumerated several examples of extrinsic evidence that could support a finding that the lost ESI would have been of assistive relevance to the moving party:

  • “Purposeful sluggishness” in turning over emails;
  • Missing interview notes combined with the weakness of defendant’s purported basis for not hiring plaintiff;
  • Documentary and testamentary evidence of defendant’s business practices;
  • Information contained in other emails that were subsequently produced; and
  • Analysis of written notes from a meeting to infer the contents of a destroyed audio recording of the same meeting.

In an effort to calibrate the burden on the moving party, the court declared that while “it is not sufficient for the moving party merely to point to the fact that the opposing party has failed to produce requested information,” “it is not incumbent upon the [moving party] to show that specific documents were lost.”

2. Discovery Relevance

In contrast to the more narrow scope of assistive relevance, the court confirmed that, for discovery purposes, information is relevant “to the extent that it appears reasonably calculated to lead to the discovery of admissible evidence.” The court then stated that before examining the three elements required to obtain a spoilation adverse inference, there must be a threshold determination as to whether any destroyed evidence had discovery relevance. Absent that, the allegedly spoliating party would have had no duty to preserve the information in the first place, and sanctions would not be warranted. In defending its reasoning, the court proceeded to question the soundness of a number of Pension Committee’s assertions, including whether discovery relevance should be presumed if the spoliating party acted in bad faith or in a grossly negligent manner:

The implication of Pension Committee, then, appears to be that at least some sanctions are warranted as long as any information was lost through the failure to follow proper preservation practices, even if there have been no showing that the information had discovery relevance, let alone that it was likely to have been helpful to the innocent party. If this is a fair reading of Pension Committee, then I respectfully disagree.

The court asserted that absent a showing that the lost information “was at least minimally relevant,” i.e., had discovery relevance, “it is difficult to see” how sanctions could be appropriate.

The court also disagreed with Pension Committee’s conclusion that a failure to issue a written litigation hold automatically qualifies as negligence or warrants a sanction in all circumstances:

In a small enterprise, issuing a written litigation hold may not only be unnecessary, but it could be counterproductive, since such a hold would likely be more general and less tailored to individual records custodians than oral directives could be. Indeed, under some circumstances, a formal litigation hold may not be necessary at all.

Instead, the court counseled that failure to adopt contemporary preservation standards should be only one factor in the court’s analysis, rather than a per se requirement.

Application to the Facts

The court specifically identified the following deficiencies in Ronsen and Orbit One’s preservation procedures:

  • Although Ronsen’s attorney issued a litigation hold to Ronsen, Rosenzweig, and Naden relating to Axonn’s claims, she failed to:
    • Consult with individuals familiar with Orbit One’s computer systems;
    • Include detailed instructions in the litigation hold;
    • Ensure that the litigation hold reached all individuals who may possess potentially relevant information; or
    • Monitor compliance with the litigation hold in any way.
  • There was no formal litigation hold put into place upon the commencement of the litigation (nor, by extension, when Ronsen or Orbit One first anticipated commencing litigation);
  • Information technology employees assisted in deleting, archiving, and manipulating potentially relevant information at the direction of Ronsen without being informed of the existence of the Axonn litigation hold or the pending litigations;
  • Ronsen, the custodian with the “greatest incentive to destroy evidence harmful to Orbit One and to his owninterests,” was responsible for managing and preserving the evidence; and
  • Ronsen’s treatment of the evidence was “cavalier”, having removed computer hardware containing potentially relevant information from Orbit One and from his control.

Nevertheless, despite all of these deficiencies, the court declined to impose sanctions, holding that the moving party failed to provide evidence that information of discovery relevance (let alone assistive relevance) was lost:

  • The 6 gigabytes of data was archived onto an external hard drive and thus still available for discovery.
  • The data in the shared folder on Ronsen’s desktop was synchronized with the servers (and by extension, his laptop), and the hard drive from the desktop was recovered from the computer technician and provided to counsel.
  • The data in the shared folders on Ronsen’s old laptop hard drive was synchronized with the server, which in turn was synchronized with the new hard drive. Furthermore, while the court found it to be theoretically possible that Ronsen deleted certain files from the old hard drive prior to the synchronization, it deemed such a conclusion “speculative” and belied by the 114 documents Numerex identified as missing, almost all of which had either already been produced in discovery or were privileged/non-substantive.
  • There was no evidence that the data on the backup disks were compromised in any way.
  • The 200 forwarded emails that Ronsen deleted remained in the individual accounts of the senders and on the Numerex email server.

Key Takeaways

While Orbit One takes issue with a number of conclusions reached in other significant e-discovery decisions, including Pension Committee and Victor Stanley II, parties and their counsel should be wary of relying too heavily upon this decision. As an initial matter, written litigation holds are still recommended in nearly all cases. The benefits of preparing and circulating a written litigation hold (as opposed to relying upon verbal instructions) far outweigh the additional burdens involved in doing so. Moreover, while the concepts of reasonableness and proportionality are admittedly not yet fully developed, they can still provide substantial guidance to parties, such as when negotiating the scope of preservation with opposing counsel in meet-and-confer conferences.

Nonetheless, Magistrate Judge Francis’s approach was refreshing in its recognition that mistakes are virtually inevitable when it comes to document preservation and that a moving party should not be eligible to receive sanctions unless non-duplicative copies of information bearing both discovery and assistive relevance have been destroyed. As it is likely to become an oft-cited decision by parties confronted with spoliation motions, we will soon learn whether other judges are willing to adopt its reasoning.