The landmark case Zubulake v. UBSWarburg, 220 F.R.D. 212 (S.D.N.Y. 2003), articulated both the procedures that parties to a litigation must follow to preserve electronically stored information (“ESI”) when litigation is reasonably anticipated and the consequences of failing to do so. However, Zubulake did not address whether non-parties must preserve ESI.With regard to document preservation, non-parties are traditionally held to a different standard than litigants. As Zubulake celebrates its five-year anniversary, its impact on the way parties in litigation conduct electronic discovery has been vast. However, Zubulake’s application to non-parties who are caught in the cross-hairs of litigation is not as clear cut. Indeed, some courts have suggested that non-parties are not required to disturb their normal rotation of their backup tapes or even distribute litigation-hold memoranda. For example, in Capricorn Power Co., Inc. v. Siemens Westinghouse Power Corp., 220 F.R.D. 429, 436 (W.D. Pa. 2004), the court observed that
[p]reservation of evidence may be particularly burdensome for non-parties, considering that their interest in the pending civil action is minuscule while the restrictions that can be imposed in a motion for preservation may be expensive and voluminous. In such instances, the party seeking preservation, and possibly the opposing party, may be required to ensure the preservation of the evidence, rather than placing that burden upon uninvolved third party possessors of the evidence.
Non-parties can take some comfort that few courts have imposed new electronic discovery obligations on them in a post-Zubalake world. Nevertheless, non-parties should still bear in mind that their action or inaction with respect to ESI preservation can be of great import to party-litigants. This article discusses some court decisions that have treated non-parties that destroyed or failed to retain electronic documents relevant to litigation as parties for discovery purposes, and placed those non-parties “on the hook” for their actions.
When a “Non-Party” is “Not Quite a Non-Party”
A 2007 decision from the Southern District of New York may cause non-parties to think twice before hitting the delete button. In NTL, Inc. Sec. Litig., 244 F.R.D. 179 (S.D.N.Y. 2007), aff ’d, 2007 WL 1518632 (S.D.N.Y. May 17, 2007), a court took a step—albeit a small one— toward applying Zubulake to non-parties. The “non-party” in NTL attained its non-party status as the result of a bankruptcy restructuring of the defendant-corporation. This case nevertheless illustrates that a non-party with a close relationship to a litigant—through bankruptcy, restructuring, or otherwise—may be viewed as a “party for discovery.” Id. at 196.
In NTL, Gordon Partners and class plaintiffs (“plaintiffs”) originally brought a securities fraud class action suit against NTL, Inc. (“Old NTL”) and individually named defendants in April 2002. Subsequently, Old NTL entered into Chapter 11 bankruptcy. Two main companies emerged from the bankruptcy: NTL Europe and New NTL. NTL Europe was the successor company to Old NTL (as well as the successor to the litigation) and had the primary responsibility of selling off Old NTL’s assets. New NTL became the surviving operational company with control of the company’s European telecommunications assets. Plaintiffs’ suit was allowed to go forward against the individually named defendants and NTL Europe.
In March 2002, prior to Old NTL’s reorganization, a document preservation memorandum was circulated to approximately forty-five employees of Old NTL. The memorandum acknowledged the reasonable anticipation of litigation, and asked the employees to retain all documents from the restructuring process that could be relevant to the matter. In June 2002, a second document preservation memorandum was circulated to all Old NTL employees, asking them to take reasonable steps to preserve all potentially relevant material, existing in paper or electronic format.
Three years later, in May 2005, plaintiffs served their initial document requests upon defendant NTL Europe and the individually named defendants. NTL Europe’s counsel informed plaintiffs’ counsel that all corporate records relating to the 1999-2002 pre-bankruptcy period were in non-party New NTL’s possession. Because New NTL was a non-party, plaintiffs were told that they had to separately subpoena New NTL. Plaintiffs did so in August 2005, requesting essentially the same documents as they had from NTL Europe. New NTL produced seventy boxes of documents to plaintiffs’ counsel for inspection and copying, but the boxes lacked several requested categories of documents, including financial analyses, subscriber integration and billing issues, and email. New NTL’s counsel told plaintiffs’ counsel that in light of its “limited role” in the litigation, New NTL’s production was “full and complete.” New NTL’s counsel further advised that, even if at one time responsive emails existed, they no longer did because New NTL’s computer servers were “upgraded” after the reorganization.
At a pretrial conference before Magistrate Judge Andrew Peck in November 2005, plaintiffs’ counsel apprised the court that non-party New NTL might have engaged in spoliation of evidence. Judge Peck expressed doubt at the usefulness of a spoliation instruction against a non-party. NTL, Inc. Sec. Litig., 244 F.R.D. at 188. In response, plaintiffs argued that “[w]e have a non-party here only in the most mythical sense,” referring to both NTL Europe and New NTL’s notice of the lawsuit prior to the reorganization. Id. At a subsequent February 2006 conference, counsel for New NTL appeared. Judge Peck welcomed their participation in the resolution of the discovery dispute; however, the court expressed some doubt over the extent to which New NTL was actually a “non-party” and referred to the entity as “not quite a non-party.” Id. at 189.
Some time later, in April 2006, the court first learned of the existence of a “Demerger Agreement” executed between NTL Europe and New NTL in January 2003. The agreement provided that “each party shall . . . allow the other party . . . to have access to . . . and . . . take copies of all documents, records or other materials containing any information which that party . . . might reasonably require . . . .” Upon learning of the agreement, the court noted its surprise and concern:
As I understand it from [plaintiffs’ sanctions brief ] there is an access agreement that lets defendant NTL [Europe] have unfettered access to all the documents of the [New] NTL . . . That’s news to me, and it is quite distressing to the Court. . . . [I]t would appear that NTL defendant had the obligation to produce all of this material in the United States as party discovery. . . . [and] frankly, the courtesy to a non-party is about to disappear . . . .
Id. (emphasis in original). The court then held that defendant NTL Europe would be held responsible for reviewing the boxes that New NTL had in storage in Europe and producing responsive documents. The court went on to warn that, if NTL Europe had “been silent throughout these proceedings about its access agreement[,] implicitly, if not explicitly, misleading the Court as to the relationship between the defendant NTL [Europe] and the ‘non-party [New] NTL’ . . ., NTL [Europe was] going to come out on the short end of this.” Id. at 190 (emphasis omitted).
The court subsequently found that there had been a failure to preserve documents and ESI relevant to plaintiffs’ allegations, as had been alleged by plaintiffs. Laying the blame on NTL Europe as the party to the litigation, the court granted plaintiffs’ motion for an adverse inference instruction. Id. at 198. Judge Peck rejected NTL Europe’s argument that it did not have “control” over any of the documents or the ESI relevant to plaintiffs’ document requests because they were in non-party New NTL’s possession. The court reasoned that Federal Rule of Civil Procedure 34(a) allows a party to request from an adversary documents “which are in the possession, custody or control of the party upon whom the request is served.” Id. at 195. “Control” does not require physical possession, but rather has been construed broadly to mean “when that party has the right, authority, or practical ability to obtain the documents from a non-party to the action.” Id. at 195. Here, the Demerger Agreement made it clear that New NTL was to make available to defendant NTL Europe any documents that it needed to comply with the lawsuit. Furthermore, even if the Demerger Agreement did not exist, the court held that it would be fair to treat both NTL Europe and New NTL as parties for discovery “‘when to do otherwise would frustrate discovery, regardless of whether [the] frustration [was] intentional or not . . . . Otherwise a litigant by contracting with a third party could nullify and evade the rules of procedure.’” Id. at 196 (citation omitted). In addition, Judge Peck held that, because the duty to preserve material for litigation arose inMarch 2002, when the first document preservation memorandum was distributed at Old NTL, NTL Europe should have preserved—or ensured that New NTL preserved—any of Old NTL’s relevant documents and ESI.
The penalty imposed by Judge Peck—an adverse inference instruction against the defendant, NTL Europe—was a blow to NTL Europe and its chances for success at trial. An adverse inference instruction allows a jury to infer from the act of spoliation that the destroyed evidence would have been unfavorable to that party. Zubulake, 220 F.R.D. at 219. Such an instruction can be devastating to a litigant, which then faces the difficult hurdle of proving to the jury that it did not destroy evidence out of a realization that the evidence was unfavorable to its claims or defenses. Id. at 219-20. In addition to the sanction of an adverse inference instruction, the NTL Court also ordered NTL Europe to pay certain attorneys’ fees and additional discovery costs. 244 F.R.D. at 201-02.
Recently a court in the Western District of Pennsylvania adopted the rational of NTL, in Centimark Corp. v. Pegnato & Pegnato Roof Mgmt., Inc., 2008 WL 1995305 (W.D. Pa. May 6, 2008). As in NTL, the defendant (Pegnato) filed for bankruptcy shortly after the action was commenced. During the bankruptcy proceedings, documents at issue were likely transferred to First Service, a non-party, in conjunction with the sale of Peganto’s assets. Id. at *4. The court rejected Peganto’s excuse that relevant ESI had been lost or destroyed while in First Service’s custody, and held that such loss or destruction by the non-party did not “relieve defendants of their responsibility in this regard as they had control of the documents for more than six months after [the] lawsuit was filed and before the assets were sold.” Id. at **5-6. The court explained, “Defendants could have—indeed, should have—taken precautions to preserve the information for litigation by maintaining copies of the documents pertaining to the lawsuit, giving [plaintiff ] access to them before the sale was completed or, at the very least, by ensuring that [plaintiff ] would have access to them after the sale was completed.” Id. at *6 (citing NTL, Inc. Sec. Litig., 244 F.R.D. at 197). The court sanctioned Pegnato for spoliation and ordered that an adverse inference instruction be read to the jury at trial. Id. at *11.
Non-parties may be obligated to preserve documents and ESI for production in a litigation if there are close ties between the non-party and the party litigant, such as document sharing agreements or significant corporatestructure relationships at the time the instant lawsuit is filed. Like the court in NTL, under such circumstances trial courts may treat non-parties as parties to the litigation for discovery purposes. Furthermore, the actual partylitigant, if spoliation or withholding occurs by the nonparty, may suffer the consequences of the non-parties’ actions.