Electronic Discovery Puts General Counsel On Front Lines

When litigation is suspected or imminent, in-house counsel must ensure the policies and procedures for preservation are immediately put into action. Danis v. USN Communications, Inc., No. 98 C 7482, 2000 WL 1694325 (N.D. Ill. Oct. 23, 2000), demonstrates how even top management are vulnerable to sanctions for improper preservation. The court criticized USN's outside directors and CEO for not taking reasonable steps to preserve electronic data at the outset of discovery. Although the outside directors had properly preserved and produced their own documents, the court stated they should have played a more active role in implementing a broader preservation policy. To impress the 'seriousness of the duty of preservation,' the CEO was personally fined $10,000 by the court, despite the absence of a willful intention to destroy documents.

Underscoring the importance of an effective preservation system from beginning to end is In re The Prudential Insurance Co. of America Sales Practice Litigation, 169 F.R.D. 598 (D. N.J. 1997). While the court concluded that the documents at issue were not destroyed in willful violation of the discovery process, persistent and recurrent destruction of documents did merit sanctions against Prudential. Even though Prudential had a document retention policy, it was inadequately circulated as was the court order requiring document preservation. Since the policy lacked uniform guidelines regarding which documents to preserve, employees destroyed documents on at least four occasions after the court order to preserve was issued. Prudential was fined $1 million, an amount the court felt reflected the gravity of the repeated incidents while having only a minimal impact on its financial stability.

As part of a company's regular preservation procedures, in-house counsel must ensure that data likely to be needed in the event of litigation or a regulatory proceeding be preserved. If the prediction that particular documents need not be preserved is incorrect, the company could be at risk for sanctions. In Gates Rubber Company v. Bando Chemical Industries, Limited, 167 F.R.D. 90 (D. Colo. 1996), an employee of the defendant company deleted word processing files, which the court determined warranted sanctions of 10% of the plaintiff company's total attorney fees and costs.

In-house counsel plays the central role in making sure the company complies with discovery requests and responds in a complete and timely manner. This has become essential to avoiding claims of and sanctions for spoliation or other infractions. Recently, in Residential Funding Corp. v. DeGeorge Financial, 306 F.3d 99 (2nd Cir. 2002), the defendant appealed the trail court's denial of a motion for sanctions for the plaintiff's failure to produce emails in time for trial. The court concluded that for non-production of evidence, a district court 'has a broad discretion to delay the start of a trial (at the expense of the party that breached its obligation), to declare a mistrial if trial has already commenced, or to proceed with a trial with an adverse inference instruction.' The court goes on to say that 'discovery sanctions, including adverse inference instruction, may be imposed upon a party that has breached a discovery obligation not only through bad faith or gross negligence, but also through ordinary negligence.' The importance of this case is in the appellate court's willingness to include ordinary negligence in 'culpable state of mind.' The court reasoned that, 'each party should bear the risk of its own negligence' and concluded that even 'purposefully sluggish' actions may be sufficient enough to warrant sanctions, including an adverse inference instruction.

In-house counsel's responsibility to provide complete electronic documentation for discovery often includes producing a document's underlying data. Such data could be the electronic records created when documents or e-mails are composed or the raw data stored in database form that allows companies to create reports. According to the Advisory Committee notes to the 1970 amendment of Federal Rule of Civil Procedures 34, Rule 34 'applies to electronic data compilations.' The defendant in Linnen v. A.H. Robbins Co., 1999 WL 462015 (Mass. Super. 1999), failed to preserve e-mails and neglected to turn over database information as ordered by the court. The court sanctioned the defendant for 'inexcusable conduct' and allowed a spoliation inference to be given to the jury.

In Crown Life Insurance Company v. Kerry P. Craig and Craig/Associates, Inc., 995 F.2d 1376 (7th Cir. 1993), the plaintiff and defendant had different interpretations of the documentation being requested by the defendant. Craig received a signed affidavit from Crown Life's Associate General Counsel stating all documents responsive to the request had been produced. During the trial, however, a Crown Life employee testified on cross-examination about a database containing raw data for calculating commissions on insurance policies sold. The court warned Crown Life during the trial that its refusal to produce the information in a timely manner could result in sanctions. Crown Life argued that the defendant requested documents relating to the calculation of commissions and that they did not consider raw data as documents since there was never a hard copy of the data. Crown Life also argued that even if the raw data was discoverable pursuant to Rule 34, it was inaccessible. Their failure to produce the data was, therefore, not willful. Under Rule 34, however, Crown Life is not relieved of its responsibility to make the data accessible to the requesting party. The court found Crown Life's failure to produce as a willful violation of the discovery orders and as a sanction, Crown Life was not allowed to present or rely on its own calculations of renewal commissions, rebut the industry's rule-of-thumb method of calculations, or rely on the portion of the contract regarding renewal commissions.

Whether as plaintiff or defendant, knowing how all facets of the company's computer systems work and being conversant in discovery requirements will give in-house counsel and the litigation team a valuable edge during the discovery phase and, subsequently, when trial begins. With an established data management system in place, in-house counsel is in a better position to assess whether the scope of discovery is appropriate or too broad and whether the company can fulfill discovery requests in a complete and timely manner. The system, thus, becomes effective for self-protection during the discovery phase.

Electronic discovery has grown up and demands better preparedness and legal strategies. As the clich' goes, the best defense is an offense. To strengthen the company's offense, in-house counsel should collaborate with the company's information technology (IT) personnel as well as outside counsel to develop data preservation procedures that incorporate the necessary elements each party needs to perform well during discovery. The investment in time, money and systems is returned when a legal crisis unfolds and the company benefits from the reduction of time and expenses expended for data retrieval and from the confidence and competency it displays throughout the process.

D. Chad McCoy is a shareholder with Parr Waddoups Brown Gee & Loveless. He practices commercial litigation with an emphasis on Internet and technology related disputes as well as intellectual property violations. Mr. McCoy is a frequent public speaker and author on Internet and technology topics such as anti-spam legislation and electronic discovery. Mr. McCoy can be reached at 801-532-7840 or [email protected]. The information provided is intended solely as informational guidance.

This is part three of a three-part series on technology-related issues of importance to General Counsel.

The increasing pressure to produce electronic data and documents in native formats puts in-house counsel on the front lines during, and even prior to, the electronic discovery phase of litigation. The basic obligations in-house counsel have prior to potential litigation include developing a corporate strategy for electronic data preservation and retrieval, implementing the plan, documenting policies and procedures in writing, and disseminating the policies and procedures to appropriate internal parties. Missteps in any of these areas can and has led to various sanctions ranging from fines to default judgments.

Even with a data preservation program in place, the courts are reluctant to allow companies to hide behind the procedures when it is clear the destruction of evidence was intentional. General Nutrition Corporation (GNC) continued its standard document destruction policy despite the existence of a protective order requiring the retention and preservation of relevant documents. GNC did not instruct its employees to preserve relevant records or make any efforts that the records would be preserved. To make matters worse, GNC's president issued a memo to all employees advising them that the preservation order 'should not require us to change our standard document retention or destruction policies or practices.' The court ruled in Wm. T. Thompson Co. v. General Nutrition Corporation Inc. , 593 F. Supp. 1443 (C.D. Cal. 1984), that the defendant's destruction of records, both paper and electronic, which it had reason to know were relevant to the case, warranted both monetary sanctions and a default judgment.

When litigation is suspected or imminent, in-house counsel must ensure the policies and procedures for preservation are immediately put into action. Danis v. USN Communications, Inc. , No. 98 C 7482, 2000 WL 1694325 (N.D. Ill. Oct. 23, 2000), demonstrates how even top management are vulnerable to sanctions for improper preservation. The court criticized USN's outside directors and CEO for not taking reasonable steps to preserve electronic data at the outset of discovery. Although the outside directors had properly preserved and produced their own documents, the court stated they should have played a more active role in implementing a broader preservation policy. To impress the 'seriousness of the duty of preservation,' the CEO was personally fined $10,000 by the court, despite the absence of a willful intention to destroy documents.

Underscoring the importance of an effective preservation system from beginning to end is In re The Prudential Insurance Co. of America Sales Practice Litigation, 169 F.R.D. 598 (D. N.J. 1997). While the court concluded that the documents at issue were not destroyed in willful violation of the discovery process, persistent and recurrent destruction of documents did merit sanctions against Prudential. Even though Prudential had a document retention policy, it was inadequately circulated as was the court order requiring document preservation. Since the policy lacked uniform guidelines regarding which documents to preserve, employees destroyed documents on at least four occasions after the court order to preserve was issued. Prudential was fined $1 million, an amount the court felt reflected the gravity of the repeated incidents while having only a minimal impact on its financial stability.

As part of a company's regular preservation procedures, in-house counsel must ensure that data likely to be needed in the event of litigation or a regulatory proceeding be preserved. If the prediction that particular documents need not be preserved is incorrect, the company could be at risk for sanctions. In Gates Rubber Company v. Bando Chemical Industries, Limited , 167 F.R.D. 90 (D. Colo. 1996), an employee of the defendant company deleted word processing files, which the court determined warranted sanctions of 10% of the plaintiff company's total attorney fees and costs.

In-house counsel plays the central role in making sure the company complies with discovery requests and responds in a complete and timely manner. This has become essential to avoiding claims of and sanctions for spoliation or other infractions. Recently, in Residential Funding Corp. v. DeGeorge Financial , 306 F.3d 99 (2nd Cir. 2002), the defendant appealed the trail court's denial of a motion for sanctions for the plaintiff's failure to produce emails in time for trial. The court concluded that for non-production of evidence, a district court 'has a broad discretion to delay the start of a trial (at the expense of the party that breached its obligation), to declare a mistrial if trial has already commenced, or to proceed with a trial with an adverse inference instruction.' The court goes on to say that 'discovery sanctions, including adverse inference instruction, may be imposed upon a party that has breached a discovery obligation not only through bad faith or gross negligence, but also through ordinary negligence.' The importance of this case is in the appellate court's willingness to include ordinary negligence in 'culpable state of mind.' The court reasoned that, 'each party should bear the risk of its own negligence' and concluded that even 'purposefully sluggish' actions may be sufficient enough to warrant sanctions, including an adverse inference instruction.

In-house counsel's responsibility to provide complete electronic documentation for discovery often includes producing a document's underlying data. Such data could be the electronic records created when documents or e-mails are composed or the raw data stored in database form that allows companies to create reports. According to the Advisory Committee notes to the 1970 amendment of Federal Rule of Civil Procedures 34, Rule 34 'applies to electronic data compilations.' The defendant in Linnen v. A.H. Robbins Co., 1999 WL 462015 (Mass. Super. 1999), failed to preserve e-mails and neglected to turn over database information as ordered by the court. The court sanctioned the defendant for 'inexcusable conduct' and allowed a spoliation inference to be given to the jury.

In Crown Life Insurance Company v. Kerry P. Craig and Craig/Associates, Inc. , 995 F.2d 1376 (7th Cir. 1993), the plaintiff and defendant had different interpretations of the documentation being requested by the defendant. Craig received a signed affidavit from Crown Life's Associate General Counsel stating all documents responsive to the request had been produced. During the trial, however, a Crown Life employee testified on cross-examination about a database containing raw data for calculating commissions on insurance policies sold. The court warned Crown Life during the trial that its refusal to produce the information in a timely manner could result in sanctions. Crown Life argued that the defendant requested documents relating to the calculation of commissions and that they did not consider raw data as documents since there was never a hard copy of the data. Crown Life also argued that even if the raw data was discoverable pursuant to Rule 34, it was inaccessible. Their failure to produce the data was, therefore, not willful. Under Rule 34, however, Crown Life is not relieved of its responsibility to make the data accessible to the requesting party. The court found Crown Life's failure to produce as a willful violation of the discovery orders and as a sanction, Crown Life was not allowed to present or rely on its own calculations of renewal commissions, rebut the industry's rule-of-thumb method of calculations, or rely on the portion of the contract regarding renewal commissions.

Whether as plaintiff or defendant, knowing how all facets of the company's computer systems work and being conversant in discovery requirements will give in-house counsel and the litigation team a valuable edge during the discovery phase and, subsequently, when trial begins. With an established data management system in place, in-house counsel is in a better position to assess whether the scope of discovery is appropriate or too broad and whether the company can fulfill discovery requests in a complete and timely manner. The system, thus, becomes effective for self-protection during the discovery phase.

Electronic discovery has grown up and demands better preparedness and legal strategies. As the clich' goes, the best defense is an offense. To strengthen the company's offense, in-house counsel should collaborate with the company's information technology (IT) personnel as well as outside counsel to develop data preservation procedures that incorporate the necessary elements each party needs to perform well during discovery. The investment in time, money and systems is returned when a legal crisis unfolds and the company benefits from the reduction of time and expenses expended for data retrieval and from the confidence and competency it displays throughout the process.

D. Chad McCoy is a shareholder with Parr Waddoups Brown Gee & Loveless. He practices commercial litigation with an emphasis on Internet and technology related disputes as well as intellectual property violations. Mr. McCoy is a frequent public speaker and author on Internet and technology topics such as anti-spam legislation and electronic discovery. Mr. McCoy can be reached at 801-532-7840 or [email protected]. The information provided is intended solely as informational guidance.