eDiscovery Issue: Reliance on Vendor to Oversee Collection from an Affiliated Company Was Insufficient

The district court sanctioned the defendants, Crimson AV, LLC and its managing director, for failing to produce relevant documents and electronically stored information (ESI) within the possession and control of an affiliated company, Sycamore Manufacturing Co., Ltd., which was not a party to the lawsuit. The plaintiff, Peerless Industries, Inc., asserted that most of the documents and ESI relevant to Peerless’ claims against the defendants were located on Sycamore’s servers and in Sycamore’s files. Accordingly, pursuant to Rule 34 of the Federal Rules of Civil Procedure, Peerless filed a request to deem documents in the possession and control of Sycamore within the possession and control of the defendants. The district court, in granting Peerless’ request, concluded that because the president of Sycamore was a principal of both Crimson and Sycamore and exercised a considerable amount of financial and managerial control over both companies, Crimson was deemed to be in control of the relevant Sycamore documents and information and therefore was able to obtain the relevant documents from Sycamore.

After the defendants failed to produce the requested Sycamore documents, Peerless filed a motion to compel, at which point the defendants agreed to produce all responsive documents in lieu of an order by the court. But rather than producing responsive documents, the defendants responded by stating that any documents responsive to Peerless’ requests had either already been produced in the litigation, no longer existed, or could not be found. However, at the subsequent Rule 30(b)(6) deposition of Crimson’s representative, Peerless learned that the defendants had not conducted a reasonable investigation regarding their production of the relevant Sycamore documents. Crimson’s representative was “unable to answer questions about Sycamore’s computer and backup systems, what searches were performed, which employees would have relevant information, whether a document hold had been implemented, or whether employees at Sycamore were even contacted regarding [Peerless’] document requests.” Following the Rule 30(b)(6) deposition, Peerless filed a motion for economic sanctions based on the defendants’ failure to produce the relevant Sycamore documents.

The district court pointed to its prior order holding that the defendants were “‘able to obtain the relevant documents Sycamore’ requested because [Sycamore’s president] was [a] principal of both Crimson and Sycamore and that he exercised a considerable amount of control over both corporations.” According to the district court, that prior order “of course required defendants to contact individuals at Sycamore and play a role in obtaining the necessary discovery.” The district court found, however, that the defendants did not “play a role,” but instead “took a back seat approach” and allowed the document investigation to proceed entirely through a “vendor.” In other words, the defendants “had no part in the process of obtaining the requested discovery or of determining how Sycamore managed their documents and what might be relevant to [Peerless’] requests.” The district court held that such a “hands-off approach” to an investigation for responsive documents is insufficient. The defendants could not satisfy their burden to produce the requested documents by “placing the burden of compliance on an outside vendor and have no knowledge, or claim or control, over the process.”

Accordingly, because the defendants had failed to properly investigate and respond to Peerless’ requests for the relevant Sycamore documents, the district court granted Peerless’ motion for economic sanctions. The district court held that the “[d]efendants must show that they in fact searched for the requested documents and, if those documents no longer exist or cannot be located, [then] they must specifically verify what it is they cannot produce.”

The Peerless case highlights two important points. First, under Rule 34 of the Federal Rules of Civil Procedure, a responding party must produce any responsive documents, ESI, and tangible things in its “possession, custody, or control,” which could include documents, ESI, and tangible things in the possession, custody, or control of an affiliated non-party (e.g., sister company, subsidiary) depending on the degree of the connection between the responding party and the affiliated non-party. Second, in conducting its search and investigation for responsive documents, ESI, and tangible things—particularly ESI—a responding party may not merely rely upon an outside vendor to conduct the investigation. Rather, the responding party must take a “hands-on” approach and play an active role in searching for responsive documents and ESI and determining which documents and ESI no longer exist or cannot be located and ,therefore, cannot be produced. Failure by the responding party to take such an active role in its search for responsive documents and ESI may result in a ruling against the responding party that it did not meet its burden under Rule 34 and an award of economic sanctions against the responding party.