Last year, Judge Shira A. Scheindlin’s Pension Committee decision from the Southern District of New York garnered much attention nationwide for its detailed and stringent analysis of the law relating to document preservation and the litigation hold process. A new Southern District of New York decision issued by Magistrate Judge Francis — also of the Southern District of New York — takes issue with some of the analysis in Pension Committee, and holds that the failure to abide by preservation standards “does not necessarily constitute negligence, and certainly does not warrant sanctions if no relevant information is lost.” In Orbit One Comm. v. Numerex Corp., 2010 WL 4615547 (S.D.N.Y. Oct. 26, 2010), the court emphasized the need to establish relevant data loss before imposing sanctions, while reiterating the need for parties to continue to take a broad approach in their preservation efforts.

Pension Committee’s Stringent Standards

Among the holdings in the Pension Committee case was an enumeration of the types of “failures [that would] support a finding of gross negligence, when the duty to preserve has attached: to issue a written litigation hold; to identify all of the key players and to ensure that their electronic and paper records are preserved; to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control; and to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.” Pension Committee, 685 F. Supp.2d 456 at 471. A failure of this kind constitutes gross negligence because “that failure is likely to result in the destruction of relevant information.” Id. at 465. Under Pension Committee, a finding that a party acted with gross negligence would lead to sanctions, including an adverse inference instruction to the jury that they may “presume . . . that such lost evidence was relevant, and that it would have been favorable” to the requesting party — although this presumption may be rebutted. Id. at 496.

The framework generally established by Pension Committee, particularly when read independently from the facts of that case, is generally perceived as formalistic in nature: the failure to undertake certain steps upon the reasonable anticipation of litigation will invariably result in a finding of gross negligence, an adverse inference instruction to the jury, as well as other sanctions. That the conclusion was considered rebuttable has largely been considered little comfort, as it is plainly difficult to “prove the negative” as to relevance and prejudice of documents that no longer exist.

The Orbit One Case: Background and Claims

In Orbit One, the court was confronted with plaintiffs who had, like many of the plaintiffs in Pension Committee, failed to take appropriate preservation steps. Orbit One, a satellite communications corporation founded by David Ronsen, was acquired in 2007 by Numerex, another company in the same industry. Numerex agreed to an “earn out” provision relating to future earnings targets and entered into employment agreements with Ronsen and other former Orbit One executives. Two years later, however, Ronsen brought an action against Numerex alleging interference with his management functions, the earn-out provision and various violations of the employment and acquisition agreements. Ronsen also subsequently resigned from Numerex, which itself brought claims against him for misappropriation of proprietary information. The specific claims do not appear to play a large role in the outcome of the decision, although it seems plain from their general description that many aspects of Ronsen’s management of Orbit One, as well as the company’s financial performance, could be the subject of relatively broad discovery.  

A Series of Preservation Failures

The court set out various examples of how Ronsen and Orbit One failed to take appropriate preservation steps during the course of the dispute. First, when litigation was reasonably anticipated, the initial litigation hold was established without input from information technology (IT) personnel, lacked detailed instructions, was not disseminated to all relevant persons, and compliance was not monitored. Second, once litigation actually was commenced, counsel failed to implement a formal litigation hold. Third, IT personnel were not informed of the litigation hold when information was, for various reasons, deleted from servers, archived or otherwise manipulated. Fourth, during the course of events, primary responsibility for preservation efforts remained with Ronsen, the individual who had the greatest incentive to destroy harmful evidence. Fifth, Ronsen’s treatment of information within his control was viewed as “cavalier” –he removed computer hardware from the premises, permitted it to leave his own control, and failed to document his archiving practices. Orbit One, 2010 WL 4615547 at * 12.

These failures repeatedly placed data at risk of loss during the course of events. For example, a desktop computer containing potentially relevant data was moved to a home garage and subsequently “cannibalized” by a technician in order to build another one. The original hard drive was recovered only later, when the technician was contacted. In another example, Orbit One’s IT administrator undertook an initiative to increase server storage space. As a consequence, over six gigabytes of data were removed from the company’s server. That data was later located on an external hard drive that had been used for archiving purposes. Additionally, after litigation had commenced, backup disks were taken out of rotation and stored in Ronsen’s office safe. However, Ronsen subsequently took them home and returned them only after he had resigned from Numerex. Also during the relevant period, Ronsen’s laptop hard drive failed and was replaced. An examination by a forensic expert in connection with the spoliation motion determined that the laptop had been synced with the company’s servers such that data was not likely to have been lost, although the court noted that the possibility of data loss could not be ruled out entirely.

The Key Factor of Relevance

Notwithstanding the failure to implement proper preservation efforts and the various ways in which seemingly relevant data was placed at risk of loss, Judge Francis declined to impose any sanctions. After noting that in the Second Circuit, “a ‘culpable state of mind’ for purposes of a spoliation inference includes ordinary negligence,” the court focused on the issue of relevance. According to the Orbit One decision, “a court considering a sanctions motion must make a threshold determination whether any material that has been destroyed was likely relevant even for purposes of discovery.” Id. at *10. The best approach is to consider preservation failures as only one factor in the analysis and “consider the imposition of sanctions only if some discovery-relevant data has been destroyed.” Id. at 11.

Judge Francis noted his disagreement with court decisions that may be read to omit the relevancy showing, such as the Pension Committee decision. “The implication of Pension Committee, then, appears to be that at least some sanctions are warranted as long as any information was lost through the failure to follow proper preservation practices, even if there [has] been no showing that the information had discovery relevance, let alone that it was likely to have been helpful to the innocent party. If this is a fair reading of Pension Committee, then I respectfully disagree.” Id. at 10. Judge Francis did agree that once culpable conduct and relevant data loss are established, there should be a presumption that the lost data would have been harmful to the spoliator, but “[f]or sanctions to be appropriate, it is a necessary, but insufficient, condition that the soughtafter evidence actually existed and was destroyed.” Id. at 11 (emphasis in original).

The court also took issue with the directive in the Pension Committee decision that a formal written litigation hold is always necessary: “For instance, in a small enterprise, issuing a written litigation hold may not only be unnecessary, but it could be counterproductive, since such a hold would likely be more general and less tailored to individual records custodians than oral directives could be. Indeed, under some circumstances, a formal litigation hold may not be necessary at all.” Id. at 11. Presumably, under an application of the Orbit One decision, a similarly flexible, context-specific analysis would also apply to the other types of preservation failures identified in Pension Committee as constituting gross negligence.

Failure Without Consequence

Applying its relevance standards to the facts before it, the court determined that “there is insufficient evidence of any loss of discovery-relevant information.” Id. at 12. Data removed from servers was located on an external archival hard drive, data on the desktop computer that had been removed from the company was synchronized with company servers, the laptop drive that failed and was replaced was synced with the servers as well, and the backup disks that were physically removed from the company were later returned. Moreover, “[n]o witness has identified any significant document that has not been produced in discovery.” Id. at 14. As a result, the motion for sanctions was denied.

Broad Preservation Still Recommended

Notwithstanding Judge Francis’ seemingly heightened standards for imposing spoliation sanctions, he rejected the proposition – frequently proposed by e-discovery practitioners and respected institutions such as The Sedona Conference – that concepts of reasonableness and proportionality that are present in the federal rules should expressly apply at the preservation phase. These concepts “may prove too amorphous to provide much comfort to a party deciding what files it may delete or backup tapes it may recycle. Until a more precise definition is created by rule, a party is well-advised to retain all relevant documents (but not multiple identical copies) in existence at the time the duty to preserve attaches.” Id. at 6. Indeed, Judge Francis finds it “unlikely” that a court “would excuse the destruction of evidence merely because the monetary value of anticipated litigation was low.” Id. at n. 10. In a footnote, the Orbit One decision indicates that reasonableness and proportionality cannot be assumed to create a “safe harbor” in the absence of “a court-imposed preservation order.” Id.

Thus, parties may continue to be well-served by negotiating the scope of preservation with adversaries or, when that is not possible, approaching the court at an early phase when preservation issues promise to be complex or burdensome in a particular case. Additionally, Judge Francis’ suggestion that a “rule” containing a “precise definition” is needed should encourage the nascent discussion on that very point within the Federal Rules Advisory Committee and other rulemaking bodies. In the interim, the best practice remains broad preservation and appropriate record-keeping. “In order to avoid sanctions, parties would be obligated, at best, to document any deletion of data whatsoever in order to prove that it was not relevant or, at worst, to preserve everything.” Id. at 11.

With so many potential avenues of data loss, it might be said that plaintiffs in Orbit One were simply luckier than other parties whose lax preservation efforts have resulted in data loss and the award of sanctions in numerous other recent decisions. The Orbit One decision was an “easy” one in the sense that every source of data placed in jeopardy by plaintiffs ultimately turned out to be duplicated elsewhere or returned. In other cases, a renewed focus on relevance promises to entangle litigants in protracted disputes about what kinds of data may have existed on a data source that has been lost. Judge Francis’ decision to place the burden of showing relevance upon the moving party before entertaining any form of sanctions reflects the continuing effort by sophisticated judges to balance the stringent preservation standards with the practical impact of lost data upon the merits of a case.

This article was originally published in Digital Discovery & E-Evidence, 11 DDEE 02, 1/20/11.