This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
- a U.S. Court of Appeals for the Tenth Circuit decision affirming the dismissal of defendant’s counterclaims as a sanction for prelitigation conduct based on the district court’s finding that defendant acted in bad faith in obtaining plaintiff’s documents outside of the discovery process and in anticipation of litigation
- a U.S. District Court for the Southern District of New York order denying plaintiffs’ request for a “quick peek” at 3,300 documents listed on the defendant’s privilege log and instead proposing appointment of a special master to conduct a privilege review of the documents at issue
- a U.S. District Court for the District of Maryland ruling that a plaintiff suing her former employer had not waived attorney-client privilege with respect to communications with her attorney using her work email account
- a U.S. District Court for the District of Maryland decision granting defendant’s motion for sanctions and awarding attorney’s fees and costs after plaintiff, the defendant’s former CEO, removed and destroyed documents in the possession of defendant’s law firm
1. In Xyngular v. Schenkel, 890 F.3d 868 (10th Cir. 2018), the Tenth Circuit affirmed the dismissal of defendant’s counterclaims as a sanction for prelitigation conduct based on the district court’s finding that defendant acted in bad faith in obtaining plaintiff’s documents outside of the discovery process and in anticipation of litigation.
In this litigation, plaintiff, a marketing company, filed suit against a former employee who had been given shares in the company in exchange for his services. Id. at 871. Plaintiff sought a declaratory judgment that defendant was entitled to a specified number of shares; that defendant’s position at the company, along with any accompanying stock rights, had been terminated; and that defendant had committed corporate waste and misappropriation of corporate resources. Defendant asserted a number of counterclaims and sought a permanent seat on plaintiff’s board of directors and a nonterminable position within the company.
Early in the litigation, plaintiff moved for terminating sanctions based on allegations that defendant had encouraged one of plaintiff’s employees to steal documents that defendant wanted in anticipation of litigation. Id. at 872. As the district court found in granting the motion for sanctions, defendant encouraged the employee to remove documents from servers of companies owned by plaintiff’s directors that provided services to plaintiff. Defendant then proceeded to review and use those documents as part of his pleadings in support of his counterclaims. Defendant was not entitled to receive the documents in this manner because defendant did not use the proper procedure to inspect the plaintiff’s books and records. Based on this prelitigation conduct, the district court concluded that defendant had acted in bad faith, dismissed defendant’s counterclaims, excluded from evidence the documents defendant had obtained, and awarded fees and costs to plaintiff.
Defendant appealed, arguing that the district court exceeded its inherent powers by imposing sanctions for prelitigation conduct and improperly applied the factors for determining the appropriate sanction. Judge Carlos F. Lucero, writing for a panel of the Tenth Circuit, affirmed the district court’s decision to dismiss defendant’s counterclaims as a sanction.
Judge Lucero first found that “a court may exercise its inherent powers to sanction bad-faith conduct that abuses the judicial process, including pre-litigation acts that directly affect a lawsuit.” Id. at 873. While a prior Tenth Circuit decision on the inherent authority to issue sanctions had not mentioned prelitigation conduct as a ground for sanctions, Judge Lucero noted that the Supreme Court has held that “[a]s long as a party receives an appropriate hearing ... the party may be sanctioned for abuses of process occurring beyond the courtroom.” Id. (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 57 (1991)). Other circuits had also “affirmed termination sanctions where bad faith prelitigation conduct extended into court proceedings.” Id. (citing Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc., 561 F.3d 1298, 1307 (11th Cir. 2009) (affirming a sanction of dismissal for a party whose “ongoing ability to intercept confidential and privileged emails” both before and during litigation would make adjudication of his claims untenable); Jackson v. Microsoft Corp., 78 Fed. Appx. 588, 589 (9th Cir. 2003) (unpublished) (affirming a terminating sanction for a party’s prelitigation receipt of privileged information because defendant “would be unfairly prejudiced were the case to go forward”)).
Judge Lucero next considered whether the district court had correctly applied the factors for selecting the proper sanction: (1) the degree of actual prejudice to the defendant; (2) the amount of interference with the judicial process; (3) the culpability of the litigant; (4) whether the court warned the party that dismissal of the action would be a likely sanction for noncompliance; and (5) the efficacy of lesser sanctions. Id. (citing Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir. 1992)). On this issue, he concluded that a clear and convincing standard applied.
When applying these factors, the Tenth Circuit found that dismissal was appropriate only in cases of willfulness, bad faith or fault. Judge Lucero agreed with the district court that there was clear and convincing evidence of bad faith where defendant gathered the documents in anticipation of litigation and did not attempt to use the proper procedure for inspecting corporate records. Id. at 874. Defendant argued that there was no record evidence that the documents were confidential, were privileged or contained trade secrets, but Judge Lucero rejected this argument, as the sanctions did not depend on whether the documents were confidential, were privileged or contained trade secrets.
Turning to the individual factors, Judge Lucero concluded that the district court had permissibly applied the factors in determining that terminating sanctions were appropriate. First, in assessing the degree of prejudice, the district court noted that defendant collected over 300 documents, and even though some of these may have been subject to discovery, defendant’s actions prevented the parties from raising privilege objections applicable to the documents at issue and led the parties to expend significant time and resources addressing this issue. Second, the district court found that defendant’s actions were a substantial interference with the judicial process as defendant had “bypassed” the discovery process to his advantage. Third, the district court concluded that defendant was culpable because he had made a “calculated decision to obtain the documents for strategic use in litigation.” Fourth, although defendant was not warned of dismissal, this factor was not dispositive, and the Tenth Circuit declined to hold that a termination sanction required a warning. Fifth, the district court explained that dismissal was the appropriate sanction because “any sanction short of dismissal would incentivize future litigants to similarly misappropriate documents in advance of litigation.”
2. In Winfield v. City of New York, 2018 WL 2148435 (S.D.N.Y. May 10, 2018), Magistrate Judge Katharine H. Parker denied a plaintiffs’ request for a “quick peek” at 3,300 documents listed on the defendant’s privilege log and instead proposed that a special master conduct a privilege review of the documents at issue. In June 2017, defendant City of New York moved for return of an accidentally produced privileged document under the agreed-on procedures set forth in the parties’ clawback agreement, which led to further discussion between the parties about defendant’s privilege designations, with plaintiffs claiming that defendant overdesignated documents as privileged. Id. at *1.
In July 2017, the magistrate judge directed plaintiffs to identify a subset of 80 documents from defendant’s privilege log that had been withheld on the basis of the deliberative process privilege. The court also ruled that defendant “would have an opportunity to re-review the 80-document subset identified by Plaintiffs and determine whether it intended to maintain its privilege claim as to each document.”
After this review, defendant maintained a claim of privilege over only 27 documents and withdrew its privilege designation for 51 documents and produced them. The magistrate judge subsequently ordered defendant to submit all 80 documents for in camera review for purposes of assessing the validity of the initial and remaining privilege designations.
Plaintiffs also contested defendant’s refusal to answer certain questions at depositions on the basis of attorney-client, work product and/or deliberative process privilege and submitted a letter seeking privilege rulings on 20 questions that defendant’s witnesses were directed not to answer. Defendant subsequently withdrew its privilege objections to six of these questions and provided plaintiffs with responses.
In February 2018, the magistrate judge issued a lengthy ruling granting defendant’s clawback demand and granting in part and denying in part plaintiffs’ motion to compel production of certain documents from the sample set of documents designated as privileged by the defendant on its privilege log. The magistrate judge also granted in part plaintiffs’ motion to compel answers to questions posed during depositions and directed the defendant to re-review its privilege designations, after which the defendant de-designated certain documents as privileged and produced them. Id. at *2.
In April 2018, plaintiffs raised a concern with a certain volume of 3,300 documents designated by defendant as privileged. The court then directed the parties to meet and confer concerning a proposal to address plaintiffs’ concerns. At that meeting, plaintiffs proposed that defendant turn over all 3,300 documents designated as privileged for a “quick peek” at them, promising to review them in only a few weeks. Defendant, which had already spent significant time reviewing documents for privilege prior to producing them, vigorously objected.
In addressing this issue, the magistrate judge took into consideration Fed. R. Civ. P. 26 and Fed. R. Evid. 502 along with legal commentary on privilege issues. The magistrate judge quoted the Sedona Conference, which has stated that Rule 502(d) “does not authorize a court to require parties to engage in ‘quick peek’ and ‘make available’ productions and should not be used directly or indirectly to do so.” The Sedona Conference, The Sedona Conference Commentary on Protection of Privileged ESI, 17 Sedona Conf. J. 1, 137 (2016). She also observed that Fed. R. Evid. 502 does not alter federal or state law on privilege “nor supplant applicable waiver doctrine generally” and governs only attorney-client privilege and work product but does not address other privileges. Winfield, 2018 WL 2148435, at *6 (citing Fed. R. Evid. 502 Advisory Committee Notes, Fed. R. Evid. 502(g)). Thus the deliberative process and legislative process privileges at issue in some of the 3,300 documents were not addressed by Fed. R. Evid. 502, and the magistrate judge stated that there was no rule that would permit her to issue an order that would allow the parties to disclose information protected by those privileges and avoid waiver of such privileges in other federal and state proceedings. Id. at *7.
Plaintiffs cited in support of their “quick peek” claim the decision of the United States Court of Federal Claims in Fairholme Funds, Inc. v. United States, 134 Fed. Cl. 680 (2017), in which the court ordered privileged documents to be turned over to the opposing party for a “quick peek.” But the magistrate disagreed with the reasoning in Fairholme that a court had the authority to issue a mandatory quick peek order, finding that Rule 26(b)(1) limits discoverable information to non-privileged information. Importantly, privileged information can be discoverable only if there is a waiver, a voluntary disclosure or an exception. The magistrate judge also pointed out that Fed. R. Evid. 502 authorizes a court to protect privilege but does not abrogate common law privileges, and a court “is precluded from interpreting the Federal Rules of Civil Procedure and the Federal Rules of Evidence in a manner that infringes on a substantive right, including privilege rights, as such rules may not by statute abridge substantive rights.” Winfield, 2018 WL 2148435, at *6. Moreover, the “quick peek” procedure provided for in Fed. R. Civ. P. 26(f) contemplates a voluntary agreement between the parties.
To further support her decision, the magistrate judge pointed to Second Circuit case law that clearly states that a court may not compel disclosure of privileged information absent a waiver or other applicable exception and also rejects plaintiffs’ claim that Fed. R. Evid. 502 superseded Second Circuit case law. Id. at *4, *8 (citing In re Dow Corning Corp., 261 F.3d 280, 284-85 (2d Cir. 2001)). Thus, the magistrate judge concluded that both controlling precedent and the structure and commentary on the Federal Rules of Civil Procedure and Federal Rules of Evidence made clear that a court may not ignore a party’s assertion of privileges merely to expedite discovery or relieve itself from determining a party’s substantive or common law rights. Id. at *8.
In light of this analysis, the magistrate judge denied plaintiffs’ request for a quick peek and instead proposed the appointment of a recently retired magistrate judge who had been proposed for a privilege review in another high-profile case. The magistrate judge noted that Fed. R. Civ. P. 53 allows for the appointment of a special master, and the Advisory Committee Notes for this rule specify that the special master can review documents for privilege. The magistrate judge also indicated that “the parties may file a letter regarding their position on the appointment of a Special Master, whether they have identified any conflict-of-interest issues that would preclude appointment of [the proposed special master], and suggest other candidates for appointment if they so desire.” Id. at *9. Last, the magistrate judge instructed plaintiffs to try to narrow the number of documents to be reviewed. 3. In Kreuze v. VCA Animal Hospitals, Inc., 2018 WL 1898248 (D. Md. April 20, 2018), United States Magistrate Judge Charles B. Day found that a plaintiff suing her former employer had not waived attorney-client privilege over communications with her attorney where she communicated with her attorney through her work email account.
During discovery in this action by Molly Kreuze against her former employer, VCA Animal Hospitals, defendant found 14 email communications between plaintiff and her attorney on plaintiff’s business email account. Upon discovery of these emails, defendant’s counsel segregated these documents and made them inaccessible to anyone except the assigned support specialist. Subsequently, plaintiff’s counsel indicated that the email communications were privileged, and defendant’s counsel filed a motion for resolution of the privilege disagreement, claiming that plaintiff waived attorney-client privileged by using an email account governed by defendant’s Information Systems Policy.
The magistrate judge considered whether plaintiff in fact waived her privilege by communicating with counsel through her work email account. To assess the waiver issue, the magistrate judge noted that courts have relied on a four-factor test: (1) whether the employer has a policy banning personal use; (2) whether the employer monitors employee’s email use; (3) whether third parties have a right of access to the computer or emails; and (4) whether the employer notified the employee, or was the employee aware, of the policy. Id. (citing In re Asia Global Crossing, Ltd., 322 B.R. 247, 257 (Bankr. S.D.N.Y. 2005)). The magistrate judge began by assessing the first factor: whether defendant has a policy banning personal use of work email. The magistrate judge found this factor favored the plaintiff, noting that the policy states that “incidental personal or non-business use of the Systems should be kept to a minimum,” therefore directly acknowledging that personal or nonbusiness use of the systems will occur.
Next, the magistrate judge addressed the second factor: whether the employer monitors employees’ use of email. The magistrate judge noted that defendant’s policy stated that employees’ email messages were not “private,” but there was no other evidence demonstrating that defendant actively monitored its systems during or after plaintiff’s employment, tipping this factor in favor of the defendant.
The magistrate judge next considered the third factor: whether third parties have a right of access to the computer or emails. The magistrate judge found this factor was neutral and did not favor either party because plaintiff did not provide any evidence that third parties had access to plaintiff’s email, and the “mere presence of a policy does not impart upon the employee the presence of third-party access.”
Magistrate Judge Day then addressed the fourth and final factor: whether the employer notified the employee, or was the employee aware, of the policy. Defendant asserted that as a result of plaintiff acknowledging receipt of VCA’s policy in June 2009, plaintiff had no reasonable expectation of privacy in her use of the email account. But the magistrate judge was not persuaded by this claim, noting that the majority of courts addressing this issue have found that an employee’s awareness is much easier to determine if the employee is required to acknowledge the policy on a regular basis. Id. (citing, inter alia, United States v. Etkin, 2008 WL 482281 (S.D.N.Y. Feb. 20, 2008)). The magistrate judge was persuaded by plaintiff’s attestations that the acknowledgment was signed at the start of her employment in 2009, close to five years prior to the sending of the emails, and he was unwilling to breach attorney-client privilege based on defendant’s singular claim of awareness from 2009. Even assuming that defendant had demonstrated awareness, the magistrate judge indicated that he was comfortable preserving the attorney-client privilege on public policy grounds, given the importance of privilege in conjunction with the weight of the first two factors favoring plaintiff.
Based on this analysis, the magistrate judge ruled that the factors weighed in favor of maintaining the attorney-client privilege.
4. In Simone v. VSL Pharmaceuticals, Inc., 2018 WL 1365848 (D. Md. March 16, 2018), Magistrate Judge Timothy J. Sullivan granted defendant’s motion for sanctions and awarded attorney’s fees and costs after plaintiff, defendant’s former CEO, removed and destroyed documents in the possession of defendant’s law firm.
In this litigation over the intellectual property rights underlying defendant’s product, defendant moved for spoliation sanctions against plaintiff. Id. at *1. The spoliation allegations related to plaintiff’s destruction of documents received from defendant’s law firm. While plaintiff was still defendant’s CEO, plaintiff requested that defendant’s law firm remove from its files documents containing sensitive information about the product’s formulation and send the documents to plaintiff. Id. at *2. Defendant’s law firm complied and, at plaintiff’s instruction, delivered the documents to plaintiff and destroyed any remaining copies. At plaintiff’s deposition, he testified that he reviewed the documents and then threw them away.
First, Magistrate Judge Sullivan concluded that plaintiff should have reasonably anticipated litigation regarding the product formulation at the time he destroyed the documents. Id. at *3. At the time that plaintiff received the documents from defendant’s law firm, plaintiff was aware of related state court litigation and moved to intervene one week after receiving the documents. Plaintiff thus should have reasonably anticipated litigation over the product’s formulation.
Second, Magistrate Judge Sullivan found that plaintiff’s destruction of documents was accompanied by a culpable state of mind. Id. at *4. To warrant sanctions for spoliation, plaintiff had to have acted with bad faith, willfulness, gross negligence or ordinary negligence. Id. (citing Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 529 (D. Md. 2010)). In this case, Magistrate Judge Sullivan found that plaintiff’s destruction of the documents was clearly intentional and thus willful. However, defendant had not presented sufficient evidence of bad faith. Though the timing of the destruction of documents was suspect, plaintiff presented a plausible explanation for his actions — namely, removing the documents from defendant’s law firm to safeguard the production formulation from competitors.
Third, Magistrate Judge Sullivan determined that the destroyed documents were relevant to the pending litigation. The relevance of the documents was presumed because plaintiff acted willfully in destroying them. Id. at *5. In addition, even without the presumption, Magistrate Judge Sullivan stated that he would have found the documents to contain relevant evidence, as they included nonpublic communications about the product formulation at issue in the litigation.
Fourth, regarding prejudice, defendant argued that the documents could have changed the course of the case because the product formulation at issue allegedly changed over time — plaintiff claimed that it did not — and evidence of these changes would have undermined plaintiff’s case. Id. at *6. In addition, defendant argued that the documents could have been used to undermine plaintiff’s credibility. In response, plaintiff used shipping records from the law firm to estimate that the destroyed documents involved only approximately 35 pages. Plaintiff also claimed that he was subsequently able to identify all, or nearly all, of the documents at issue after his recollection was refreshed following the initial deposition. Based on the subsequent identification of documents, plaintiff argued that with the exception of publicly available articles, all of the destroyed documents were produced to plaintiff during discovery. Reviewing these arguments, Magistrate Judge Sullivan concluded that defendant suffered some slight prejudice from the destruction of the documents. Id. at *7. While plaintiff argued that the destroyed documents that could not be located were publicly available articles, Magistrate Judge Sullivan could not know that for sure and assumed that defendant suffered some prejudice.
When it came time to determine the proper sanctions, Magistrate Judge Sullivan concluded that it was appropriate to require plaintiff to reimburse defendant for the attorney’s fees and costs incurred in connection with investigating the spoliation and bringing the motion for sanctions. Id. at *8. Defendant had requested dismissal of plaintiff’s claims or an adverse inference jury instruction, but Magistrate Judge Sullivan found these remedies unwarranted as plaintiff did not act in bad faith and the prejudice was slight. Id. at *7-8.
In addition to the spoliation sanctions, defendant also moved for sanctions on the grounds that plaintiff produced a document written in a shorthand version of Italian braille and failed to produce certain requested documents. Id. at *9.
Regarding the braille documents, defendant argued that producing documents in that fashion violated a prior order requiring plaintiff to produce documents. Plaintiff argued that the documents were produced in the manner in which they were kept along with a narrative description of the contents and noted that defendants were able to have the document translated. After defendant moved for sanctions, Magistrate Judge Sullivan ordered that plaintiff be redeposed on, among other topics, the contents of the documents produced in braille. For that reason, Magistrate Judge Sullivan found that any prejudice from the production of the braille documents had been cured.
Defendant further asked for permission to forensically image and examine all of plaintiff’s devices as a result of plaintiff’s alleged failure to produce all requested documents. Id. at *10. Defendant relied on the fact that a third party had produced documents with communications that plaintiff had not produced during discovery. Magistrate Judge Sullivan denied the request because it was not clear that this remedy was proportional to the needs of the case considering the amount of discovery that had already been produced. In addition, it was not relevant to the case whether plaintiff possessed the documents that defendants obtained elsewhere during discovery.