This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:

  1. a District of Arizona case denying plaintiffs’ request for discovery of communications among defendants’ 18 foreign entities and foreign regulators, finding that such discovery was not proportional under Federal Rule of Civil Procedure 26(b)(1)
  2. a Delaware District court decision ordering $3 million in sanctions and an adverse jury instruction against a defendant whose senior executive permanently deleted tens of thousands of his emails and directed others to do likewise despite the company’s various efforts to inform and educate its employees of their preservation duties during litigation
  3. a District of Kansas case addressing the standards of revised Fed. R. Civ. P. 34 on the information to be provided regarding withheld documents in denying plaintiff’s motion to compel defendant to produce documents withheld as privileged
  4. an Eastern District of Pennsylvania order permitting plaintiff’s “substantial” and “rather broad” discovery and rejecting defendant’s claim that the discovery was too costly after finding it was proportional to the needs of the case

1. In In re Bard IVC Filters Products Liability Litigation, 2016 WL 4943393 (D. Ariz. Sept. 16, 2016), United States District Judge David G. Campbell denied plaintiffs’ request for discovery of communications among defendants’ 18 foreign entities and foreign regulators, finding that such discovery was not proportional under Federal Rule of Civil Procedure 26(b)(1).

In this multidistrict product liability case, plaintiffs alleged injury from using defendants’ filters in the United States and argued that the discovery of communications generated by the defendants’ foreign entities with foreign regulators regarding the filters at issue might show inconsistencies between the foreign submissions and communications with American regulators. Id. at *4.

Judge Campbell assessed the relevancy and proportionality of these foreign communications under amended Federal Rule of Civil Procedure 26(b)(1). As an initial matter, on the issue of relevance, he pointed out that the language in the former Rule 26(b)(1) allowing discovery of information “reasonably calculated to lead to the discovery of admissible evidence” had been deleted in the 2015 amendment and stated that the 2015 advisory committee note had indicated that this provision had “‘been used by some, incorrectly, to define the scope of discovery.’” Id. at *1 (quoting 2015 advisory committee note). Noting that “[o]ld habits die hard,” he stated that “many courts continue to use the phrase” but pointed out that amended Rule 26(b)(1) was adopted pursuant to the Rules Enabling Act, 28 U.S.C. § 2072 et seq., which provides that “‘all laws in conflict with such rules shall be of no further force or effect after such rules have taken effect.’” Bard, 2016 WL 4943393, at *2 (quoting Rules Enabling Act). As a result, he concluded that “the 2015 amendment effectively abrogated cases applying a prior version of Rule 26(b)(1).” Bard, 2016 WL 4943393, at *2.

Judge Campbell also noted that the 2015 amendment added proportionality as a requirement for permissible discovery and, citing the advisory committee note, stated that “‘[t]he parties and the court have a collective responsibility to consider the proportionality of all discovery and consider it in resolving discovery disputes.’” Id. (quoting 2015 committee advisory note).

Turning to the present dispute, Judge Campbell reviewed the relevance of the foreign communications. He observed that the plaintiffs in this multidistrict litigation were all located in the U.S. Based on representations by defendants, the judge determined that defendants’ U.S. divisions “largely controlled” the preparation of documentation sent by foreign entities to foreign regulators, and accordingly, most of the communications in dispute would be captured through electronically stored information (ESI) searches already underway. Bard, 2016 WL 4943393, at *3-*4. Defendants conceded, however, that some foreign entities engaged in their own communications with foreign regulators, id. at *3-*4, but Judge Campbell found that it was “mere conjecture” and “more hope than likelihood” that defendants’ communications with foreign regulators would be inconsistent with defendants’ communications with American regulators. Id. at *4. Thus, while relevancy under Rule 26(b)(1) is broader than relevancy for purposes at trial, Judge Campbell concluded that the requested discovery was only marginally relevant. Id.

On proportionality, Judge Campbell found that only one of the factors listed under Rule 26(b)(1) — “relative access to relevant information” — favored granting plaintiffs’ requested discovery. Id. He stated that the “importance of the discovery to resolving the issues,” as discussed in the relevancy context, “appears marginal,” while the burden or expense of the proposed discovery “would be substantial,” involving 18 entities over a 13-year period to identify custodians and then pick out those custodians’ communications with foreign regulators. Id. at *4-*5. The judge noted the “substantial discovery with respect to Defendants’ communications with American regulators,” along with depositions of relevant witnesses, “should capture communications with foreign regulators that originate in the U.S., as most appear to.” Id. at *5. Judge Campbell found that that burden outweighed the benefit of the discovery sought, i.e., “the mere possibility” that this discovery could reveal communications inconsistent with defendants’ communications with U.S. regulators. Id. at *5. For these reasons, Judge Campbell denied plaintiffs’ request. Id. at *5.

2. In GN Netcom, Inc. v. Plantronics, Inc., 2016 WL 3792833 (D. Del. July 12, 2016), United States District Court Judge Leonard P. Stark ordered $3 million in sanctions and an adverse jury instruction against a defendant whose senior executive permanently deleted tens of thousands of his emails and directed others to do likewise despite the company’s various efforts to inform and educate its employees of their preservation duties during litigation.

Plaintiff accused defendant of monopolizing the headset market, and defendant instituted a legal hold in response to plaintiff’s demand letter. Id. at *1-*2. Defendant issued the hold to affected employees, hosted training sessions to ensure compliance and distributed quarterly hold reminders. Id. at *2. Despite these efforts, a senior executive, who was allegedly a key participant in the activities giving rise to the underlying antitrust claims, repeatedly responded to email messages he found potentially damaging by instructing recipients to delete the messages. Id. The executive and some of the other employees deleted email messages, and the executive went so far as to double delete potentially relevant messages — deleting emails first from his mailbox, and then from his deleted files folder — in an effort to permanently delete the emails. Id.

Once defendant’s in-house counsel became aware of the senior executive’s activities, she initiated several remedial actions, including putting the executive’s assistant on the legal hold, implementing technology on the executive’s system to prevent email message deletion, collecting the emails of 21 other custodians who were known to have corresponded frequently with the executive, and obtaining and preserving the backup tapes that held the executive’s email. Id. at *3. Defendant also engaged two computer forensic experts to take steps to preserve and recover the executive’s email, including preserving potentially relevant personal archive email files, forensically imaging the executive’s phone and tablet and restoring the backup tapes. Id. One expert produced a preliminary report indicating that the executive deleted between 36,397 and 90,574 unrecoverable emails, of which 6.5 percent were potentially responsive. Id. Defendant, however, did not take any further steps after the expert reported these findings and decided not to incur the minimal additional cost to finish the report and investigation. Defendant also “unrestored” the backup tapes the expert had restored. Id.

During depositions, the senior executive testified that he did not believe he had deleted any relevant email messages. Id. In addition, despite the forensic expert’s report indicating that thousands of messages were unrecoverable, defendant’s CEO testified during multiple depositions that he believed the company had recovered all of the executive’s deleted messages. Id. at *4.

In the course of discovery, plaintiff ultimately became aware that defendant had hired a computer forensic expert and requested information and documents related to the expert’s findings. Defendant refused to provide plaintiff with the expert’s name, claiming work-product privilege, and defendant’s outside counsel denied the existence of any report generated by the expert. The court extended the discovery period to allow discovery on the email deletions and defendant’s efforts to recover the emails. Id. Plaintiff thereafter retained its own computer forensics expert, who found a higher responsive rate range of 6.5 percent to 16.5 percent of unrecoverable emails deleted by the senior executive. Id. at *5. Based on its expert’s finding, plaintiff sought spoliation sanctions under Rule 37(e). Id. Under the 2015 amendments to Rule 37, when a party fails to take reasonable steps to preserve ESI that should have been preserved and the ESI cannot be restored or replaced, a court may impose sanctions upon finding either prejudice to a party due to the ESI’s loss or the intent to deprive that party of the ESI. Id.

Defendant argued that it had indeed taken reasonable steps to preserve the lost ESI. Id. at *6. The court rejected this argument, finding that it was not convinced that defendant had taken all the reasonable steps available to recover the executive’s deleted messages. Id. at *6-*7. The court specifically pointed out that defendant could have extended its expert’s investigation to other employees known to have deleted messages at the executive’s instruction or could have paid the expert to complete its analysis. Id. at *7. The court also noted that defendant could have ensured that the backup tapes the expert had restored were preserved and not unrestored. Id. The court found that defendant’s extensive document preservation efforts did not absolve it of responsibility for the failure of a member of its senior management to comply with his document preservation obligations. Id.

The court next analyzed whether the executive’s spoliation constituted “bad faith.” Defendant argued that because the executive acted against the company’s directives, his behavior should not be attributed to the company. Id. The court disagreed, finding that the executive acted in an effort to protect the company, not himself personally, because he deleted emails after receiving the litigation hold notice and sought to permanently delete the emails. As a result, Judge Stark concluded that he acted in bad faith with an intent to deprive plaintiff of the email messages and that as a senior executive acting in bad faith, his actions should be attributed to the company. Id. at *7-*8. The court also rejected defendant’s argument that there was no prejudice to plaintiff, especially given defendant’s acknowledgment of its inability to recover many of the executive’s potentially responsive email messages. Id. at *9.

After finding that sanctions against defendant under Rule 37(e) were appropriate, the court turned to consideration of appropriate sanctions. Id. at *12. Under Rule 37(e)(1), the court imposed monetary sanctions for almost 18 months of attorney fees and costs related to litigating the missing email issue and $3 million in punitive sanctions, which was three times the amount defendant docked from the executive’s pay for his misconduct. Id. at *12-*13. The court also noted that these sanctions did not necessarily redress the lost information and therefore also imposed an adverse inference jury instruction pursuant to Rule 37(e)(2) that the deleted email messages were unfavorable to defendant. Id. at *13.

3. In Rowan v. Sunflower Electronic Power Corp., 2016 WL 3743102 (D. Kan. July 13, 2016), U.S. Magistrate Judge Teresa J. James addressed the standards of revised Fed. R. Civ. P. 34 on the detail to be provided regarding withheld documents in denying plaintiff’s motion to compel defendant to produce documents withheld as privileged.

Defendant Power Constructors Inc. (PCI) delivered an amended privilege log to plaintiff Michael Rowan on Feb. 26, 2016. Id. at *1. In response, Rowan contended that the attorney-client privilege did not apply to emails on PCI’s privilege log that were not written by or directly received by an attorney and argued with respect to the three specific document requests that PCI had waived its attorney-client privilege and work product doctrine objections by not asserting those objections in its initial responses but first raising those claims in its amended response. Id. at *2. Last, Rowan alleged that PCI had not complied with a court order requiring PCI to review its initial responses to Rowan’s First Request for Production of Documents and, “if appropriate, amend its responses to accurately and fully state what documents counsel is withholding from production on any basis,” as Rowan complained that it could not determine what documents were withheld. Id. PCI contested Rowan’s motion to compel, contending that no law supports Rowan’s position that the attorney-client privilege applies only to emails that attorneys wrote or received; the three document requests at issue sought either the same or subsets of documents addressed in plaintiff’s other requests; and PCI fully complied with the court’s order and with Fed. R. Civ. P. 34 in its amended responses by stating what limits controlled its search for documents. Id.

The court first reviewed Rule 34. The magistrate judge stated that under the Federal Rule a party responding to a discovery request must expressly assert claims of privilege and work product if the party is withholding otherwise discoverable information on those grounds. Id. The 2015 amendments to Rule 34 now also require an objecting party to “state whether any responsive materials are being withheld on the basis of that objection.” Id. at *3 (quoting Fed. R. Civ. P. 34(b)(2)(c)). The court noted that the advisory committee’s note on the new rule states that the “producing party does not need to provide a detailed description or log of all documents withheld, but does need to alert other parties to the fact that documents have been withheld and thereby facilitate an informed discussion of the objection.” Id.

With this legal standard in mind, the magistrate judge addressed Rowan’s requests to compel additional responses from PCI. Id. The magistrate judge first considered and rejected the claim that an attorney must write or be the direct recipient of an email for the privilege to apply, noting that in the corporate context “attorney-client privilege may attach to documents transmitted between non-attorney employees of the corporation if the communications are confidential and are for the purpose of obtaining legal advice from an attorney.” Id. (citation omitted). Therefore, the court rejected Rowan’s argument that the attorney-client privilege did not apply to documents on the privilege log where an attorney was not the author or primary recipient. Id.

The magistrate judge also considered Rowan’s claim that PCI had waived privilege with respect to documents responsive to three specific document requests by failing to assert privilege and work product objections in its initial responses and making them for the first time in its amended responses. Id. The magistrate judge concluded that PCI did not designate any new or additional documents as privileged on its amended log but simply indicated that the privileged documents might be responsive to additional document requests. As “PCI did not expand the number of privilege objections or withhold more documents on the basis of privilege,” the magistrate judge rejected Rowan’s claim. Id. at *5.

The magistrate judge then turned to Rowan’s last argument that PCI had not complied with the court’s order to amend and fully state what was being withheld. Id. Magistrate Judge James pointed out that Rule 34 requires that an objection “must state whether any responsive materials are being withheld on the basis of that objection,” a requirement added by the 2015 amendments to the Federal Rules of Civil Procedure. Id. Indeed, the magistrate judge noted that she had ordered PCI to review its responses to plaintiff’s document requests to mirror the amended language to ensure that PCI’s objections would comply with the new requirement but pointed out that “Rule 34 does not require PCI to provide a detailed description or log of the documents withheld.” Id. Because PCI’s Consolidated and Amended Responses stated the limits that controlled its search for responsive documents, the magistrate judge found that PCI’s responses were sufficient under amended Rule 34 to put plaintiff on notice that PCI withheld documents in connection with its objection. She stated that Rowan could seek clarification as to the documents provided or seek other documents through additional discovery requests. Id. at *5-*7.

4. In First Niagara Risk Management, Inc. v. Folino, 2016 WL 4247654 (E.D. Pa. Aug. 11, 2016), District Court Judge Stewart Dalzell permitted plaintiff’s “substantial” and “rather broad” discovery, rejecting defendant’s claim that the discovery was too costly after finding it was proportional to the needs of the case.

In this matter, defendant joined First Niagara Risk Management (First Niagara) as a senior executive in 2010 and received $5 million for two companies he sold to First Niagara. Id. at *1. As part of the arrangement, Folino signed a noncompetition agreement that barred him from competing with First Niagara. Id. Despite this agreement, First Niagara alleged that Folino began working with another First Niagara employee in 2015 to set up a business that directly competed with First Niagara. Id. at *2.

First Niagara sought injunctive relief relating to Folino’s actions, and the parties agreed to a stipulated preliminary injunction pursuant to which the parties would use an “independent third party forensic discovery company.” Id. During discovery, First Niagara filed a motion to permit the e-discovery vendor to conduct searches of all of Folino’s personal electronic devices and email accounts using roughly 100 separate terms and covering a 2 ½-year period. Id. Folino objected to this request as overly broad, unduly burdensome and excessively costly and sought to disqualify the e-discovery vendor based on alleged ex parte contacts with First Niagara. Id.

In reviewing First Niagara’s motion to compel the requested discovery, the court acknowledged that First Niagara’s discovery requests were “rather broad” and involved “substantial” costs. Id. at *3, *4. The court determined, however, that the requests were nevertheless proportional to the needs of the case in light of the following factors: Information produced in discovery demonstrated that Folino was involved in forming the competing company and recruiting First Niagara employees to join the company; Folino had access to the information at issue while First Niagara did not; and the information sought was highly relevant to First Niagara’s claims. Id. As for Folino’s claim that compliance with the discovery requests was cost-prohibitive, Judge Dalzell noted that Folino’s “complaints about cost ring hollow from someone who just sold two companies for over $5 million” and found that the benefit from the discovery justified the expense in part because First Niagara had “uncovered evidence that one of its top executives may have started a competing company while under its employ.” Id. at *4.

Folino separately moved to disqualify the e-discovery vendor, alleging that the vendor breached its duty of independence and its agreement with the parties as a result of ex parte communications with First Niagara and that the vendor’s “secrecy” regarding its processes meant that “it can only be assumed that [the vendor] is violating the neutrality provisions upon which its engagement was conditioned.” Id. The court noted that it “may disqualify a consultant if that consultant previously worked for an adversary in the litigation and, in turn, acquired confidential information while performing that work.” Id. (citing Wang Labs, Inc. v. Toshiba Corp., 762 F. Supp. 1246, 1248 (E.D. Va. 1991)). To this end, the court recited the two-part inquiry for disqualification of expert witnesses that it determined would be appropriate to apply to this matter: “(1) Did the adversary... have a confidential relationship with the expert?; and (2) Did the adversary disclose confidential or privileged information to the expert that is relevant to the current litigation?” First Niagara, 2016 WL 4247654, at *5 (citing Greene, Tweed of Delaware, Inc. v. DuPont Dow Elastomers, L.L.C., 202 F.R.D. 426, 428-29 E.D. Pa. 2001)). The court found that Folino offered no evidence that the vendor had disclosed confidential or privileged information to First Niagara that was relevant to this litigation and therefore denied Folino’s motion to disqualify the e-discovery vendor. First Niagara, 2016 WL 4247654, at *5.