A recent order in the case of Dan Harkabi and Gidon Elazar v. SanDisk Corp., 08 Civ. 8203 (WHP) (Aug. 23, 2010), illustrates some of the electronic discovery challenges that organizations face in managing preservation obligations in connection with departing employees. In that case, the Southern District of New York District Court imposed sanctions on defendant SanDisk for discovery violations in its defense of a lawsuit filed by former SanDisk employees Harkabi and Elazar.

There are three key points raised by this opinion. First, SanDisk had no clear policies and procedures in place to preserve the hard drive and email data of departing employees. Second, in-house counsel for SanDisk became disengaged from the preservation process after circulating initial legal hold memoranda and did not sufficiently supervise the implementation of that legal hold during the IT department’s upgrade to the email system and management of hard drives. Third, the Court considered SanDisk’s status as a technology company in its decision to impose severe sanctions, noting that the “size and cutting-edge technology [of SanDisk] raises an expectation of competence in maintaining its own electronically stored information.” [emphasis added]

The underlying dispute centers on an “earn-out” provision contained in the acquisition agreement of a software company. Plaintiffs Harkabi and Elazar sold their software company, MDRM, Inc., to SanDisk in exchange for $10 million in cash and $4 million in escrow to be paid as an earn-out based on sales of SanDisk products utilizing MDRM technology. In connection with the acquisition, Harkabi and Elazar became employees of SanDisk. During the course of their employment, a dispute arose between plaintiffs and SanDisk regarding the distribution of the earn-out money. During the payment dispute, SanDisk fired both Harkabi and Elazar.

Harkabi and Elazar used SanDisk-issued laptops and corporate email accounts throughout their employment. As the dispute intensified, plaintiff’s counsel sent SanDisk a document preservation letter. In response, SanDisk’s inhouse counsel circulated four “Do-Not-Destroy” memoranda and ordered the preservation of the Harkabi and Elazar laptops. The laptops were securely stored for more than one year, at which point a helpdesk employee was permitted to redistribute the Harkabi and Elazar laptops after imaging and preserving the hard drive data. The data from the laptop hard drives was saved on a SanDisk file server. During this time, SanDisk also converted to a new email archival system.

Following the commencement of discovery, SanDisk realized that it could not locate the data from the Harkabi and Elazar laptops. SanDisk did not disclose this information to plaintiffs, however, instead offering a series of excuses for the missing data, which included SanDisk advising plaintiffs that laptops were typically recycled 30 days after employees left the company, SanDisk claiming that they had no reason to believe they had not fully complied with the “Do-Not-Destroy” memoranda, and SanDisk stating that “all electronic documents from [the] hard drives that are relevant to this dispute have already been produced.”

Eventually, SanDisk produced 1.4 million electronic documents, which it characterized as “everything” responsive to plaintiff’s requests. After plaintiffs exerted considerable efforts to locate materials that they remembered being on their laptop hard drives, SanDisk acknowledged that the hard drive data had not been included in the prior production and could not be located.

In addition, plaintiffs conducted an extensive analysis of the data produced by SanDisk and concluded that, despite their requests, SanDisk had produced no emails that originated in the Harkabi or Elazar custodian files. During the briefing of plaintiffs’ motion for discovery sanctions, SanDisk conceded that, despite the existence of Do-Not-Destroy memoranda, they did not produce some of Harkabi’s and Elazar’s emails because they were not preserved during SanDisk’s transition to a new email archival system. The Court acknowledged that SanDisk had finally begun searching its backup tapes for the missing emails, but noted that the significant deficiencies in its initial production would likely have gone undetected if not for the extraordinary efforts of Harkabi and Elazar in sifting through vast amounts of data.

In assessing whether sanctions were appropriate for SanDisk’s spoliation of the Harkabi and Elazar laptop data and the delay in producing Harkabi’s and Elazar’s email, the Court found that SanDisk was, at a minimum, negligent in its conduct, that plaintiffs had adduced sufficient evidence to conclude that the lost laptop data was relevant and that SanDisk’s statements in describing its productions had been less-thanforthright. Further, the Court determined that SanDisk’s in-house counsel’s apparent decision to disengage from the preservation process after issuing the Do-Not-Destroy memoranda amounted to a failure to properly supervise that process, which contributed to the loss of the laptop data and the failure to transfer plaintiffs’ email to the new email archive system. Importantly, the Court stated that SanDisk, as a global company that “champions itself a leader in electronic data storage” with cutting-edge technology, should be held to a higher standard of competence in implementing its preservation obligations.

Ultimately, the Court determined that the spoliation of the laptop data and the delay in the production of email warranted different sanctions. With respect to the spoliation of the laptop data, because of the loss of relevant information and SanDisk’s negligence, the Court determined that an adverse inference instruction to the jury would be fashioned after all of the evidence had been received. With respect to the delayed production of email, the Court found that the prejudice to plaintiffs was mitigated by the fact that they would have the benefit of all of their emails at both trial and during depositions. However, the Court appeared troubled by the fact that without plaintiffs’ forensic analysis and their counsel’s persistence, the deficiencies in SanDisk’s email production would not have come to light, and noted that SanDisk’s misrepresentations about its production effectively “stopped discovery in its tracks.” Thus, the Court assessed monetary sanctions of $150,000 in attorneys’ fees for the late production of the Harkabi and Elazar email. The Court reasoned that this sum would be “sufficient to compensate Plaintiffs for their added expense and deter SanDisk from taking shortcuts.”

Dan Harkabi and Gidon Elazar v. SanDisk Corp. is a reminder that the departure of an employee is a situation fraught with potential electronic discovery challenges, that in-house counsel has a continuing responsibility to monitor the implementation of legal holds and that deliberate attempts to misrepresent discovery efforts can have negative consequences. Further, the notion that a technology company should be held to a higher standard of competence for preservation is one worth noting, as it may be a sentiment— accurate or not—that other courts share.