It has been seven years since Judge Sheindlin issued the first of her six Zubulake opinions, addressing in detail the obligations of litigants to preserve and produce relevant electronically stored information (“ESI”). During that time, e-discovery has become a major component of complex litigation, and the threat of sanctions has become a serious worry for both inside counsel and litigators. Concerned that e-discovery sanctions have become a tool to increase leverage in litigation, Magistrate Judge Paul Grimm of the District of Maryland used his recent opinion in Victor Stanley, Inc. v. Creative Pipe, Inc. (Victor Stanley II) to lay out the law of preservation and the standards for sanctions in every Federal Circuit. No. MJG-06-2662 (D. Md. Sept. 9, 2010). His clear roadmap of the standards should help inside counsel ensure that their companies are taking the necessary steps to avoid being the target of a successful motion for sanctions.

The opinion also reminds litigants that:

  • The key principle of e-discovery is proportionality. Not every scrap of ESI can be or should be retained or produced. Litigants have to balance the value of the discovery with the burden of producing it.
  • The Zubulake opinions, while considered by many commentators to be the primary authority on e-discovery obligations, are not the law in every Circuit. Judge Grimm’s chart lays out the actual standards for each Circuit.
  • Companies need to remember to be vigilant about the utilities being run on their systems. Users can permanently delete potentially relevant ESI using standard Microsoft utilities like Disk Defragmenter and Disk Cleanup. Use of these utilities will not itself result in sanctions, but both counsel and IT staff need to be aware if such applications are used at the outset of a litigation.

CPI’s Conduct

The underlying lawsuit was a claim brought by Victor Stanley, Inc. (“VSI”), a manufacturer of site furnishings, against Creative Pipe, Inc. (“CSI”), a competitor, alleging that CPI used a pseudonym to download proprietary specifications and designs from VSI’s website, which CPI then submitted as its own in bids. Op. at 7. Throughout the litigation, CPI’s President, Mark Pappas, repeatedly destroyed relevant ESI, despite numerous Court orders instructing Pappas to retain relevant ESI. Id. These discovery abuses led VSI to file several motions for sanctions against CPI. According to Judge Grimm, CPI’s conduct “constitute[s] the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench.” Op. at 34.

Specifically, Judge Grimm identified eight failures to preserve relevant ESI that resulted in permanent destruction of data, including violation of preservation orders, use of utilities to permanently wipe deleted ESI, and failure to preserve an external hard drive. Op. at 6. This conduct led the judge to recommend a default judgment be granted on Plaintiffs’ primary claim, and to hold Defendant’s President, Mr. Pappas, in contempt of court, ordering that he pay Plaintiffs’ attorneys’ fees and costs in their entirety, or serve less than two years in prison.

Judge Grimm levied these sanctions based on the Fourth Circuit’s test, which not only looks at breaches of a duty to preserve, but also “the level of culpability involved in the failure to preserve; . . . the relevance of the evidence that was not preserved; and . . . the prejudice to the party seeking discovery of the ESI that was not preserved.” Op. at n. 7.

Here, the level of culpability was high because the evidence demonstrated that Pappas’s destruction of ESI was both willful and in bad faith. For example, the evidence demonstrated that Pappas had deleted thousands of files from his computer the day before a discovery hearing on failure to preserve evidence. Op. at 11. Pappas also failed to turn over his personal hard drive for imaging despite a Court order to the contrary. Id. Finally, Pappas ran utilities like Disk Cleanup and Disk Defragmenter on his machine to ensure that files could not be recovered. Id.

Additionally, the relevance of the evidence was not in question because Defendant conceded that the files destroyed were directly relevant to VSI’s copyright infringement claims. Op. at 35. In particular, the missing files included specifications and designs from VSI, as well as records of visits to VSI’s website. Also, the destroyed evidence directly supported Plaintiffs’ claims and hurt Defendants’ case. Therefore, the prejudice to Plaintiffs’ claims caused by the destruction of this ESI was extreme, justifying the harsh sanctions imposed.

Outlining the Standards

Although the facts of this case were extreme enough to warrant serious sanctions, Judge Grimm notes that e-discovery sanctions should never be an issue in most cases. He also notes, however, that parties have begun to use the threat of sanctions as a club, leading courts to spend more time reviewing motions for sanctions than deciding cases. The fear of sanctions is compounded by the fact that there is no national standard for preservation or spoliation, leading to confusion about what standards companies need to follow.

To try to eliminate the confusion, Judge Grimm discusses the standards concerning: (1) the scope of the duty to preserve and (2) the culpability and prejudice requirements for the different types of sanctions in each of the federal Circuits. For ease of reference, the Court also condensed this information into a 12-page chart, which is an excellent resource for in-house counsel and litigators alike. Additionally, throughout the analysis, Judge Grimm makes plain that practitioners cannot just assume that the Zubulake opinions are the standard in every jurisdiction. It is critical that inside and outside counsel are aware of the relevant standards so they can determine whether the appropriate steps are being taken to avoid sanctions.

Judge Grimm also reminds litigants that the duties to preserve and produce are not absolute. As he notes, pursuant to the Federal Rules, the scope of a duty to preserve or produce is always a matter of proportionality. Op. at 50. Therefore, as a general rule, a party’s obligation to preserve is proportional – that is, a company need only preserve and produce ESI where the burden of preserving it does not outweigh the likely benefit.

Finally, the opinion serves as a reminder to be aware of standard applications that can permanently destroy relevant ESI. Although Pappas used Disk Cleanup, Disk Defragmenter and other cleanup utilities to willfully destroy traces of deleted files, many users run them on work computers to improve their machines’ performance. Users may not realize that using these utilities, which are a standard part of the Windows Operating System, can lead to the destruction of ESI, so they may continue using them even when a document hold is in place. While this type of destruction would not be willful, counsel needs to be aware if these utilities are being run, and corporations may want to avoid the possibility entirely by locking down such features, or expressly warning users not to use them in the document hold order.