E-Discovery Update

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

  1. a Western District of Pennsylvania decision ordering a party seeking production of electronically stored information (ESI) to first confer with the producing party to come to an agreement on the search terms to be used in determining responsive ESI
  2. a District of Utah ruling finding spoliation by defendant but declining to order a terminating sanction or adverse inference because plaintiff failed to show as required by Fed. R. Civ. P. 37(e) that defendant sought to deprive plaintiff of use of the evidence at trial and ruling instead that the parties could present evidence on the spoliation at trial
  3. a Northern District of California order granting two permissive adverse inference instructions against defendant for failing to preserve text messages and for not complying with court orders to produce data in native format
  4. a District of Alaska ruling imposing spoliation sanctions against plaintiff after concluding that defendants were prejudiced by such spoliation and ordering measures designed to put the parties on “equal footing” in the litigation with respect to the spoliation

1. In Pyle v. Selective Ins. Co. of America, 2016 WL 5661749 (W.D. Pa. Sept. 30, 2016), U.S. Senior District Court Judge Terrence F. McVerry compelled a party seeking production of ESI to first confer with the producing party to come to an agreement on the search terms to be used in determining responsive emails.

Plaintiff sought from defendant’s employees all documents relating to plaintiff’s employment, including her receipt of disability payments and her termination. Defendant produced certain documents and stated that it had retrieved additional email archives as well. Defendant requested that plaintiff agree to appropriate search terms for locating relevant documents in those additional email archives, but plaintiff refused. Id. at *1.

Defendant moved to compel plaintiff to provide ESI search terms or else relieve defendant of the obligation to produce the ESI. Judge McVerry granted the motion insofar as it sought to require plaintiff to confer and come to an agreement on the search terms defendant would use to cull through the additional email archives. Id. at *2. In doing so, Judge McVerry rejected as “incomprehensible” plaintiff’s argument that no authority supported defendant’s request, finding it “entirely consistent with both the letter and spirit of the Federal Rules of Civil Procedure.” Id. at *2. Judge McVerry noted that the rules contemplate a “party-driven process” for electronic discovery, with Rule 26(f)(3)(C) requiring the parties to confer on such issues, and that the local rules explicitly require the parties to meet and confer on an ESI search protocol. Id. (internal quotation marks omitted). The court stated that it “will not set a deadline by which this must take place, but it is in the best interest of all parties, to amicably resolve the outstanding issue of the methodology for ESI searching as expeditiously as possible, so that production can be completed without unreasonably delaying discovery.” Id. (internal quotation marks omitted).

2. In First American Title Ins. Co. v. Northwest Title Ins. Agency, LLC, 2016 WL 4548398 (D. Utah Aug. 31, 2016), Magistrate Judge Paul M. Warner found spoliation by defendant but refused to order a terminating sanction or adverse inference because plaintiff failed to show as required by Fed. R. Civ. P. 37(e) that defendant sought to deprive plaintiff of use of the evidence at trial and ruled instead that the parties could present evidence on the spoliation at trial.

While still employed by plaintiff, defendants Michael Smith and Jeff Williams communicated regarding their plans to establish a branch office of defendant Northwest. They resigned from plaintiff on or about March 10, 2015, to join Northwest, and other First American employees departed for Northwest in the following days. On March 17, 2015, plaintiff sent a preservation demand letter to Smith, Williams and other Northwest employees, and Smith orally instructed recipients of the preservation letter to follow its provisions. Three weeks later, plaintiff sued Smith, Williams and Northwest for unfair competition and tortious interference with contract, among other claims. Id. at *1.

Plaintiff moved for spoliation sanctions on several grounds. Magistrate Judge Warner reviewed the terms of Rule 37(e) relating to spoliation of ESI and noted that the Tenth Circuit applied the same standards to non-ESI spoliation issues. Id. at *2 (citing Turner v. Pub. Serv. Co. of Colorado, 563 F.3d 1136, 1149 (10th Cir. 2009). The magistrate judge then turned to plaintiff’s spoliation claims. First, plaintiff argued that defendants’ failure to issue a written litigation hold and reliance on a verbal litigation hold was inadequate and constituted “gross negligence.” First American, 2016 WL 4548398, at *2. The magistrate judge stated that reliance on a verbal litigation hold could be “problematic” but noted the absence of any case law indicating that a verbal litigation hold was “per se violative of a party’s duty to preserve.” Id. Magistrate Judge Warner concluded that “[o]ther than generalities and conclusory statements, [plaintiff] fails to allege prejudice from issuance of an oral hold, as opposed to a written one, and did not establish what ESI was lost due to an oral, as opposed to a written, hold.” Id. at *2-*3.

The parties also disagreed on the start date for the preservation obligation. Noting that the Tenth Circuit states that the preservation obligation begins when litigation is imminent, the magistrate judge rejected plaintiff’s argument that defendants’ preservation duty arose upon the incorporation of Northwest but also declined to adopt defendants’ position that the preservation duty arose when the complaint was filed. Id. at *3 (citing Burlington N. & Santa Fe Ry. Co. v. Grant, 505 F.3d 1013, 1032 (10th Cir. 2007). Instead, the magistrate judge found that the “[d]efendants knew or reasonably should have known that litigation was imminent shortly after receipt of the preservation demand on March 18, 2015.” First American, 2016 WL 4548398, at *3.

Magistrate Judge Warner then reviewed several categories of allegedly lost ESI, including emails on defendants Smith and Williams’ personal accounts and computers that they shared with their respective spouses; documents deleted by Smith from his office computer and company iPad shortly before his resignation; Smith’s Northwest emails between Feb. 28 and March 10, 2015; and plaintiff documents destroyed by nonparty Northwest employees. In each case, with one exception, the magistrate judge concluded that plaintiff failed to show that the lost ESI was potentially relevant, that it was lost after the duty to preserve had arisen or that it could not be restored or replaced through other discovery. Id. at *3-*5.

One employee (Cole) lost a thumb drive as well as hard-copy documents that she had taken from plaintiff upon her departure from Northwest in mid-March 2015. Magistrate Judge Warner analyzed the spoliation of both the ESI and non-ESI documents under Rule 37. Id. at *5. He found that it was likely that the documents were lost after the duty to preserve had arisen because Cole closed or attempted to close transactions for Northwest that were either based on or related to the plaintiff’s documents and ESI, and such closings likely occurred after the March 18, 2015, preservation date. Id. As defendants used the lost ESI and documents to close transactions, those materials “go directly to the claims and issues of the case,” and plaintiff was “prejudiced by not having access to the documents and thumb drive.” Id. In this instance however, as plaintiff had not shown that defendants had acted with the intent to deprive plaintiff of the documents’ use in litigation, Magistrate Judge Warner ruled that plaintiff was not entitled to evidence preclusion, an adverse inference or monetary sanctions. Id. at *6 (citing Fed. R. Civ. P. Rule 37(e)(2)). Instead, he ruled that the parties could present evidence and argument regarding spoliation at trial and left it to the trial judge to determine the appropriate mechanism for presenting such evidence and argument. Id.

3. In First Financial Security, Inc. v. Freedom Equity Group, LLC, 2016 WL 5870218 (N.D. Cal. Oct. 7, 2016), Magistrate Judge Howard R. Lloyd granted two permissive adverse inference instructions against defendant for failing to preserve text messages and for not complying with orders to produce data in native format.

In this contract and unfair competition lawsuit, plaintiff moved to sanction defendant for its spoliation of requested text messages, as ordered by the court. Id. at *1, *3. Defendant conceded that the requested text messages had been deleted but argued that its custodians’ deletions were “purely out of ignorance or inadvertence.” Id. at *3 (internal quotation marks omitted). Magistrate Judge Lloyd rejected this explanation, noting that defendant’s principals had agreed not to communicate electronically regarding possible legal claims, which “suggests a shared intent to keep incriminating facts out of evidence.” Id. Magistrate Judge Lloyd therefore concluded that defendant had acted to deprive plaintiff of the use of the deleted messages, as required for awarding an adverse inference instruction under Fed. R. Civ. P. 37(e)(2). Id. at *3-*4. As it was not certain, however, that the spoliated messages would have evinced defendant’s intent to recruit plaintiff’s contractors in violation of applicable law, Magistrate Judge Lloyd ruled that the instruction would be permissive, allowing but not requiring the jury to presume that the spoliated messages were favorable to plaintiff. Id. at *4.

Plaintiff also moved for sanctions against defendant for failure to comply with two prior orders to produce native-format copies of data. Id. at *5. In resisting the motion, defendant argued for the first time that it lacked possession, custody or control over the requested data in the possession of defendant’s vendors. Id. Magistrate Judge Lloyd rejected this argument as procedurally improper, as defendant had not raised this claim in the prior 10 months and thus had deprived plaintiff of the opportunity to seek the materials from defendant’s vendors before the close of discovery. Id.

Defendant argued that sanctions would nonetheless be unjust for two reasons. First, defendant stated that its failure to fulfill its obligations was due to the “computer ignorance” of its principals and counsel rather than bad faith. Id. at *6 (internal quotation marks omitted). Magistrate Judge Lloyd disagreed, reasoning that “gross negligence” was sufficient to issue an adverse-inference instruction under Rule 37(b)(2). Id. Second, defendant claimed that the physical spreadsheet it produced completely and accurately represented the pertinent information that plaintiff sought in native format. Id. Magistrate Judge Lloyd again disagreed, stating that inspection of the native-format data and associated metadata would allow plaintiff to verify the accuracy of other materials produced by defendant, including facts asserted in the physical spreadsheet that defendant produced. Id. Recognizing, however, that defendant’s misconduct could have evinced ignorance rather than subjective bad faith, Magistrate Judge Lloyd again determined that a permissive adverse inference instruction was the appropriate remedy for the prejudice that plaintiff suffered as a result of that misconduct. Id. at *6-*7.

4. In Security Alarm Financing Enterprises, L.P. v. Alarm Protection Technology, LLC, 2016 WL 7115911 (D. Alaska December 6, 2016), U.S. District Court Judge Sharon L. Gleason issued spoliation sanctions against plaintiff after concluding that defendants were prejudiced by such spoliation and ordering measures designed to put the parties on “equal footing” in the litigation with respect to the spoliation.

Two home security companies — Security Alarm Financing Enterprises, L.P. (SAFE) and Alarm Protection Technologies, LLC (APT) — each accused the other of poaching customers and disparaging the other’s products and services. APT believed that much of SAFE’s alleged misconduct occurred on customer calls made to SAFE’s call center. During discovery, APT requested all SAFE recordings with its Alaska-based customers. SAFE produced only 150 recordings, as the rest of the “thousands” of such records had been overwritten pursuant to SAFE’s database’s overwriting process. Id. As such, APT moved for sanctions, contending that the loss of these phone calls warranted sanctions against SAFE. Id.

Before the court addressed the merits of APT’s motion, it had to determine whether to apply the revised or former version of Fed. R. Civ. P. 37. The court recognized that the alleged conduct occurred before Rule 37 was amended, but APT filed its motion seeking sanctions after the amended Rule 37 took effect. Id. at *2. The court stated that although in some cases it was unjust to apply a new rule retroactively, it was unjust only when that rule governed conduct. Id. The court indicated that Rule 37 did not govern conduct, and under both the former and revised Rule 37, a party had the same duty to preserve evidence for use in litigation. Id. For these reasons, the court determined that it would apply amended Rule 37(e) when determining sanctions. Id.

The court noted that the revised Rule 37 provides that sanctions may be appropriate if ESI that “should have been preserved” is “lost because a party failed to take reasonable steps to preserve it,” and it cannot be replaced. Id. To this end, the court looked at three factors to determine whether sanctions were appropriate: (1) if there was a duty to preserve, (2) if there was a loss of that ESI because a party failed to take reasonable steps to preserve it and (3) if the lost ESI was irreplaceable. Id.

The court first evaluated whether there was a duty to preserve the recordings. In this matter, the phone recordings were destroyed after the suit was filed, litigation was ongoing and it was readily apparent that these recordings would be relevant to the litigation. As a result, the court found that SAFE had a duty to preserve the recordings. Id.

The court then looked at whether SAFE took reasonable steps to preserve the recordings. SAFE pointed out that the recordings at issue were lost due to the normal operation of its data retention policy. Id. at *4. The court determined that this loss could have been avoided, as SAFE failed to issue a litigation hold that encompassed preservation of these records. Id. The court indicated that at the time it issued its litigation hold, SAFE had clear notice that the recordings would be potentially relevant to the ongoing litigation, and therefore it was under an obligation to take reasonable steps to preserve the recordings. Id. Accordingly, the court found that SAFE failed to take reasonable steps to preserve the recordings. Id.

The court then concluded that since neither party had indicated that the recordings were recoverable from any other sources, the recordings were irreplaceable. Therefore, the court concluded that spoliation did occur. Id.

Next, the court determined what sanctions were appropriate to address SAFE’s spoliation. The court noted that amended Rule 37(e) authorizes two sets of remedies depending on the nature of the spoliation. If there was a finding of prejudice, the court may take measures no greater than necessary to cure the prejudice. Id. at *5. Harsher sanctions are available in situations in which the spoliating party acted with “intent to deprive” another party of the information’s use in the litigation. Id. If the court makes the finding of intent to deprive, it could (1) presume the lost information was unfavorable to SAFE, (2) instruct the jury that it may or must presume the information was unfavorable to SAFE or (3) dismiss the action and enter a default judgment. Id.

The court, upon reviewing the record, indicated that the facts were too “murky” to conclude that SAFE acted with an “intent to deprive” APT of the recordings when they were overwritten. Id. at *6. Although it was unreasonable for SAFE to fail to include the recordings in their litigation hold notice, the court was not persuaded that this failure to preserve was done with an intent to deprive. Id.

The court then considered whether APT had been prejudiced by the spoliation of the recordings. SAFE attempted to defeat a finding of prejudice by arguing that it produced the call notes relating to the recordings and that the customers were known and could be deposed. It also claimed that most of the thousands of calls lost were likely irrelevant to the case. Id. at *7. The court agreed with SAFE that many of the calls were likely irrelevant but stated that the parties would never know due to the spoliation. It also found that the call notes were far inferior to the recordings themselves and that deposing the hundreds of customers would be cost-prohibitive and time-consuming and not likely to produce reliable evidence. Based on these factors, the court concluded that APT had been prejudiced by the spoliation. Id.

Given the prejudice to APT, the court considered the remedies sought by APT, which included attorneys’ fees for the motion, an order precluding SAFE from using any of the 150 recordings favorable to its case at trial and the opportunity to present evidence of the spoliation and instruction to the jury that it may consider such evidence. Id. The court agreed that APT was entitled to attorneys’ fees and that SAFE should be precluded from presenting its recordings at trial. Id. The court also indicated that it would instruct the jury that SAFE was under an obligation to preserve these records and would allow the parties to present argument on this topic to allow the jury to make its own assessment, but the court ruled that APT could not argue that the jury may or should presume that the spoliated evidence was favorable to APT. Id. Judge Gleason found that these remedies would put the parties on “equal footing” with regard to SAFE’s lost recordings. Id.