Companies who utilize cloud vendors to store their data on cloud-based applications should be advised: failing to understand the application’s storage and retrieval capabilities, and failing to preserve such data during litigation could lead to sanctions for both the company and its counsel. That’s the lesson to be learned from a recent case in the Southern District of Ohio, one of the first of its kind to directly address the intersection between the cloud and its impact on litigation strategy.

In Brown v. Tellermate Holdings, Ltd., Case No. 2:11-cv-1122, 2014 U.S. Dist. LEXIS 90123 (S.D. Ohio July 1, 2014), plaintiffs, in an age discrimination suit against former employer Tellermate, Inc. (“Tellermate”), sought electronically stored information (“ESI”) from accounts that they and other employees maintained with Salesforce.com (“Salesforce”) during their employment to aid their argument that their terminations were due to their ages, and not due to performance issues. Salesforce is a cloud-based vendor with whom Tellermate had contracted to provide Tellermate employees with a sales tracking tool to record all customer-related activity.

The Salesforce contract gave Tellermate access to the accounts and provided the ESI remained the property of Tellermate. However, Tellermate erroneously informed its counsel that it could not gain access to the ESI. Tellermate’s counsel, who the Court found unreasonably relied on Tellermate’s representations and misconstrued the Salesforce contract, repeatedly misrepresented to the Court that the ESI residing on Salesforce’s cloud could not be accessed.

The Court ordered Tellermate to produce the requested ESI. Nevertheless, Tellermate waited nine months from receiving the Order before asking Salesforce about its backup policy, thus learning for the first time that Salesforce did not keep backup files for more than three to six months from the current date. Tellermate’s failure to timely ask its cloud vendor about its backup system or promptly take measures to either suspend Salesforce’s policy, or obtain a backup copy of the ESI early in the litigation, guaranteed that the ESI was unreliable, if not irretrievable.

The Court found that the actions of Tellermate and its counsel were “simply inexcusable,” and ordered that Tellermate could not present or rely upon evidence that it terminated the plaintiffs’ employment for performance-related reasons either at the summary judgment phase or at trial. The Court also ordered Tellermate and its counsel to jointly pay the plaintiffs’ reasonable attorneys’ fees and costs incurred in the various ESI-related discovery motions.

The Brown decision emphasizes the importance that employers who use cloud-based applications understand the terms of the agreement with the cloud-based provider, including (1) who maintains control and ownership of the ESI; (2) the provider’s backup policy; and (3) the options for preserving the ESI to maintain its reliability. By fully understanding the intricacies involved in using cloud-based technology and taking appropriate steps at the beginning of a litigation to preserve discoverable ESI, an employer and its counsel can prevent misrepresentations to the court and take measures to avoid sanctionable conduct.