e-Discovery Revisited

A wide disparity exists in the federal judiciary over the level of culpability necessary as a condition precedent to the imposition of sanctions for failing to timely or properly implement a litigation hold. However, once a federal court begins evaluating a party's culpability for spoliation, the party is in the unenviable position of damage control, as opposed to proactively preventing spoliation. The proper time to address e-discovery and spoliation issues is before litigation becomes reasonably foreseeable.

John Roth holds the title of Assistant General Counsel, ACE American Insurance Company, and counsels Claims in coverage and complex litigation. Thomas Jones is vice-chair of Cozen O'Connor's Global Insurance Group and co-chair of the firm's Global Electronic Discovery and Records Management Group.

The discovery process has long been the most expensive and often most contentious aspect of litigation. The focus of many discovery disputes has shifted over the last 10 years to disputes involving electronic data. This change in focus is rooted in the change in the manner in which we choose to communicate with one another. In the past few decades, commerce in general and the insurance industry in particular have moved away from paper-based communication toward electronic communication including e-mail because our customers, vendors and managers all require prompt, courteous and efficient communications. This change has resulted in significant consequences for the litigation process.

In December 2006, the Supreme Court adopted major changes in the Federal Rules of Civil Procedure. Many states have followed the lead of the federal courts by adopting similar rules. These changes were the culmination of a number of: 1) high profile cases involving spoliation of evidence and the court's inherent power to marshal discoverable evidence; and 2) studies and writings undertaken in the legal community, especially through an organization called the Sedona Conference. It has become clear that an organization must affirmatively address its electronic discovery obligations or face the consequences of its indecision at a later point in time. A prudent carrier's efforts to get its own “electronic house in order” will directly benefit the company as: 1) the company will be prepared for litigation and the resultant e-discovery scrutiny; and 2) the company will have greater flexibility in selecting litigation strategies by virtue of its preparation for e-discovery challenges.

The threshold issue in most electronic discovery disputes is determining when the person or entity had an obligation to preserve evidence. At the outset, it is important to observe that this obligation applies equally to plaintiffs and defendants. It is now generally recognized that the obligation to issue a litigation hold arises when litigation is reasonably anticipated. See Thomas M. Jones and Helen A. Boyer, Should an Insurer Institute a Litigation Hold to Preserve Data after Denying a Claim (Tort Source, Vol. 10, No. 2, Winter 2008). As a practical matter, this means that the preservation obligation may arise before litigation actually ensues.

While there is general agreement concerning the threshold issue of when the litigation preservation obligation commences, the body of e-discovery law is far from static, and this year has already brought two significant e-discovery decisions from two respected federal jurists. Those decisions are outlined below. It is apparent from even a cursory review of these decisions that there are deep divisions in the judiciary concerning the level of culpability necessary to impose sanctions, and whether the imposition of sanctions is within the purview of the court or the jury. This article presents some historical context illustrating the early development of e-discovery jurisprudence, continues with a discussion of the influential Sedona Conference and the findings of the Advisory Committee on the federal rules, analyzes the most recent case law, and outlines a prudent approach to e-discovery.

Early Litigation

Courts initially confronted with e-discovery issues sought a resolution by applying the then-applicable discovery rules to the facts of the case at hand. As a consequence, these early decisions approached the question of when the duty to preserve evidence arises in several ways.

• The Second Circuit initially held that the “obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation ' most commonly when suit has already been filed ' but also on occasion in other circumstances, as for example when a party should have known that the evidence may be relevant to future litigation.” Kronisch v. United States , 150 F.3d 112, 126 (2nd Cir. 1998).
• The Eighth Circuit similarly held that “if the corporation knew or should have known that the document would become material at some point in the future then such documents should have been preserved.” Lewy v. Remington Arms Co. , 836 F.2d 1104, 1112 (8th Cir. 1988).
• Other courts have held that the preservation duty is triggered only when litigation is actually pending or is “reasonably foreseeable.” Silvestri v. General Motors Corp. , 271 F.3d 583, 590 (4th Cir. 2001). The tests applied include elements of probability and reasonableness.

In 2003, Judge Shira Scheindlin issued a seminal e-discovery decision in Zubulake v UBS Warburg, 217 FRD 309 (S.D.N.Y. 2003). Zubulake involved a contentious gender discrimination and wrongful discharge case. While it is unclear whether Laura Zubulake had a strong employment discrimination case against UBS, the ensuing discovery disputes likely impacted the outcome of the litigation. The court issued five opinions, and all but one of them addressed some aspect of electronic discovery. The e-discovery opinions were considered groundbreaking in nature and addressed the following issues: 1) the scope of a party's duty to preserve electronic evidence during the course of litigation and the difference between accessible and inaccessible data; 2) the lawyer's duty to monitor the client's compliance with electronic data preservation and production; 3) mechanisms and approaches to data sampling; 4) cost-shifting mechanism and associated burdens when a party seeks restoration of inadmissible backup tapes from its adversary; and 5) the imposition of sanctions for spoliation of electronic data. While the factual background and legal arguments asserted in the case are beyond the scope of this article, this series of decisions significantly expanded both the obligations on the parties and outside counsel to take responsibility for e-discovery and caused many in the legal community to take a new look at this issue and to develop best practices for e-discovery.

Sedona Conference

The Sedona Conference is a nonprofit, charitable research and educational organization that organizes a series of working groups to address current challenges in the law. The Conference's working groups facilitate discussion among diverse interests and professions in order to propose solutions to these challenges. The working groups are composed of individuals (academics, jurists, experts and others), businesses and law firms.

The Sedona Conference assembled a working group responsible for formulating best practices for attorneys to follow in addressing electronic discovery in the spring of 2002. The genesis of the working group was the realization that there were few legal guideposts available to assist parties and jurists in handling e-discovery issues, but a wealth of conflicting consulting advice on how these issues ought to be addressed. The working group noted that the then-existent version of the federal rules was ill-equipped to address this issue, and there was an ever-increasing risk of disparate decisions in the state and federal courts. The working group was tasked with implementing a reasonable solution to the challenge facing jurists and litigants confronted with electronic discovery issues. The electronic discovery working group, officially called “WG1: Electronic Document Retention and Production,” published 26 articles from March 2003 to July 2009. The Sedona Conference publications (which often contain guidelines and commentary) have been employed by jurists to evaluate conduct of litigants.

Changes in the Federal Rules of Civil Procedure

The federal judiciary was also becoming increasingly aware that the then-existing discovery rules, embodied in the Federal Rules of Civil Procedure, were not suited to address the increasingly complex issues surrounding e-discovery. The Advisory Committee of the Federal Rules of Civil Procedure submitted a comprehensive package of proposed changes to the Rules, including changes to Rules 16, 26, 33, 34, 37 and 45. The advisory committee made the following comments concerning the need to update the Federal Rules of Civil Procedure:

The advisory committee monitored the experiences of the bar and bench with these issues for several years. It found that the discovery of electronically stored information is becoming more time-consuming, burdensome, and costly. The current discovery rules, last amended in 1970 ' provide inadequate guidance to litigants, judges, and lawyers in determining discovery rights and obligations in particular cases. Developing case law on discovery into electronically stored information under current rules is not consistent and is not necessarily limited by the specific facts involved. Disparate local rules have emerged to fill this gap between the existing discovery rules and practice, and more courts are considering local rules. Without national rules, adequate to address the issues raised in electronic discovery, a patchwork of rules and requirements is likely to develop. The New E-Discovery Rules, Amendments to the Federal Rules of Civil Procedure, Dahlstrom Legal Publishing, pp. 9-10 (quoting Judicial Conference Committee on Rules of Practice and Procedure).

The U.S. Supreme Court subsequently adopted all of the proposed amendments to the Federal Rules of Civil Procedure, and these changes were effective Dec. 1, 2006. The changes to the Rules fostered a uniform approach to e-discovery issues, striking a balance of the discovery burdens between litigants. Even so, the continued refinement of the Rules of Civil Procedure and the various guidelines promoted by the Sedona Conference have not answered all of the questions about the responsibilities of the various parties to protect information to make it available for later e-discovery, as will be illustrated by the discussion below.

Recent Developments

Pension Committee Case

On Jan. 15, 2010, U.S. District Judge Scheindlin issued a controversial e-discovery opinion in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, et al. that can alter the result of a litigated matter. 685 F.Supp.2d 456 (S.D.N.Y. Jan. 15, 2010) (Amended Order), subtitled “Zubulake Revisited: Six Years Later.” The Pension Committee case, pending in the U.S. District Court for the Southern District of New York, significantly raised the stakes for parties that fail to timely implement a written litigation hold to preserve potentially relevant documents and data. In this seminal decision, Judge Scheindlin imposed severe, case-altering sanctions for failing to properly implement a litigation hold involving the preservation and collection of electronically stored information.

In the Pension Committee case, a group of investors brought an action to recover losses of $550 million stemming from the liquidation of two British Virgin Islands-based hedge funds in which they held shares. Following the close of discovery, the defendants moved for sanctions, alleging that each plaintiff failed to preserve and produce documents, including those stored electronically. Judge Scheindlin noted that the case did not present any egregious examples of litigants purposefully destroying evidence. Rather, it involved plaintiffs failing to timely institute written litigation holds and engaging in careless and indifferent collection efforts after the duty to preserve data arose.

Judge Scheindlin noted the well-developed rule that “Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents.” The court applied a party's level of culpability in the discovery process by holding:

[T]he first step in any discovery effort is the preservation of relevant information. The Court, in referring back to the Zubulake IV decision, Zubulake v. UBS Warburg LLC , 220 F.R.D. 212 (S.D.N.Y. 2003), held that “definitely after July, 2004 ' the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.

The next step in the discovery process is collection and review. ' For example, the failure to collect records ' either paper or electronic ' from key players constitutes gross negligence or willfulness as does the destruction of email or backup tapes after the duty to preserve has attached. By contrast, the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players, likely constitutes negligence as opposed to a higher degree of culpability. Similarly, the failure to take all appropriate measures to preserve ESI likely falls in the negligence category. These examples are not meant as a definitive list. Each case will turn on its own facts and the varieties of efforts and failures are infinite.

Judge Scheindlin next addressed the burden of proving that evidence has been lost or destroyed and the consequences resulting from that loss:

[I]n short, the innocent party must prove the following three elements: that the spoliating party (1) had control over the evidence and an obligation to preserve it at the time of destruction or loss; (2) acted with a culpable state of mind upon destroying or losing the evidence; and that (3) the missing evidence is relevant to the innocent party's claim or defense.

The court found that for those plaintiffs who were grossly negligent, the defendants adduced enough evidence that plaintiffs failed to produce relevant documents and that the defendants were themselves prejudiced as a result. Thus, the jury was permitted to presume both the relevance of the missing documents and resulting prejudice to the defendants, subject to the plaintiffs' ability to rebut the presumption to the satisfaction of the trier of fact. For those plaintiffs found to be negligent, the jury was instructed that the defendants must demonstrate that any destroyed documents were relevant and the loss was prejudicial.

Finally, Judge Scheindlin summarized her decision as follows:

After a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures 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 paper and 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.

Rimkus Consulting Case

On Feb. 19, 2010, U.S. District Judge Lee Rosenthal decided another significant litigation hold case and challenged some of Judge Scheindlin's rulings. In Rimkus Consulting Group, Inc. v. Cammarata, a group of forensic engineers left Rimkus to set up their own competing business. Rimkus v. Cammarata, 2010 WL 645253 (S.D. Tex. Feb. 19, 2010). The departing employees filed suit initially in Louisiana state court seeking to nullify certain non-compete agreements. Rimkus countered by filing an action alleging that the departing employees breached the non-competition and non-solicitation covenants contained in their written employment agreements. Unlike the Pension Committee case, the Rimkus case involved willful behavior characterized as “bad faith” conduct. The defecting employees attempted to cover their tracks, and the court sanctioned them for it. Costs, attorney fees, and an adverse inference jury instruction were part of the sanctions. Importantly, these were the same sanctions imposed by Judge Scheindlin in the Pension Committee case for negligent conduct.

However, in a clear departure from the Pension Committee case, Judge Rosenthal held that absent clear evidence of “bad faith,” a party should not be subject to harsh sanctions:

' The circuit differences in the level of culpability necessary for an adverse inference instruction limit the applicability of the Pension Committee approach. And to the extent that sanctions are based on inherent power, the Supreme Court's decision in Chambers may also require a degree of culpability greater than negligence.

Finally, Judge Rosenthal introduced the concept of proportionality to preservation and discovery conduct. Rimkus is the first judicial notice of preservation proportionality. Judge Rosenthal held in this regard:

These general rules are not controversial. But applying them to determine when a duty to preserve arises in a particular case and the extent of that duty requires careful analysis of the specific facts and circumstances. It can be difficult to draw bright-line distinctions between acceptable and unacceptable conduct in preserving information and in conducting discovery, either prospectively or with the benefit (and distortion) of hindsight. Whether preservation or discovery conduct is acceptable in a case depends on what is reasonable, and that in turn depends on whether what was done ' or not done ' was proportional to that case and consistent with clearly established applicable standards. As Judge Scheindlin pointed out in Pension Committee, that analysis depends heavily on the facts and circumstances of each case and cannot be reduced to a generalized checklist of what is acceptable or unacceptable.

Judge Rosenthal recognized that spoliation allegations are being used by parties as a litigation strategy and therefore should be carefully scrutinized by the courts. He stated, “Spoliation of evidence ' particularly of electronically stored information ' has assumed a level of importance in litigation that raises grave concerns. Spoliation allegations and sanctions motions distract from the merits of a case, add costs to discovery, and delay resolution.”

Judge Rosenthal's opinion in Rimkus is widely viewed as a victory for the corporate bar. Significantly, instead of directing the jury that defendants intentionally deleted e-mails, Judge Rosenthal left it to the jury to decide whether the defendants intentionally deleted e-mails to prevent their use in litigation, and whether the defendants' actions constituted bad faith destruction.

Litigation Hold Protocols

In response to the continuing development of the judiciary's views on e-discovery, insurance carriers must take steps to address their information management obligations and control the resulting e-discovery costs. One fundamental assumption underlying an insurer's litigation hold policy is that in the case of claims-related litigation against carriers, claim departments are in the best position to evaluate whether litigation is reasonably anticipated. Generally speaking, as soon as litigation is reasonably anticipated, Claims should advise the appropriate internal legal personnel, which can be responsible for issuing litigation holds and taking other appropriate actions. A prudently designed litigation hold protocol should be designed to:

1. Define the triggering event as the reasonable anticipation of litigation;
2. Outline the potential sources of relevant information or materials, including identification of key custodians and defining the types and location of potential data;
3. Communicate the duty to preserve, including communication with key custodians, IT, and records management to ensure preservation of both electronic and paper records;
4. Outline the process of implementing a preservation plan, including evaluating whether other sources of potential information exist;
5. Review and update the litigation hold, including reminding key custodians of their continuing obligations to preserve data, and evaluating the scope of the litigation;
6. Propose a mechanism for documenting the litigation hold;
7. Propose a mechanism for communicating and documenting cessation of the litigation hold to assure that previously held records are returned to the company's record management process and not held indefinitely.

In applying litigation hold protocols, carriers must keep in mind the significant differences between electronically stored information and paper records. The Advisory Committee (a group of judges, U.S. Department of Justice representatives, practicing lawyers and legal scholars who regularly review and propose changes to the Federal Rules of Civil Procedure) issued a Report recommending adoption of the new federal e-discovery rules, and succinctly outlined these differences:

The discovery of electronically stored information raises markedly different issues from conventional discovery of paper records. Electronically stored information is characterized by exponentially greater volume than hardcopy documents. Commonly cited current examples of such volume include the capacity of large organizations' computer networks to store information in terabytes, each of which represents the equivalent of 500 million typewritten pages of plain text, and to receive 250 to 300 million e-mail messages monthly. Computer information, unlike paper, is also dynamic; merely turning a computer on or off can change the information in its stores. Computers operate by overwriting and deleting information, often without the operator's specific direction or knowledge. A third important difference is that electronically stored information, unlike words on paper, may be incomprehensible when separated from the system that created it. The New E-Discovery Rules, Amendments to the Federal Rules of Civil Procedure, Dahlstrom Legal Publishing, p. 9 (quoting Judicial Conference Committee on Rules of Practice and Procedure).

There are additional differences between electronic and paper discovery. These differences include: 1) the fact that electronic documents are searchable, but the scope of the search is not uniform and may require special equipment; 2) electronic documents may contain hidden fields of data that are not easily discovered or reviewed, and these data fields may contain privileged, work product or other protected information, and inadvertent disclosure may cause significant harm to a litigant; and 3) the storage of electronic data in the aggregate is more costly than that of paper records. These differences, when considered as a whole, may be beneficial or harmful in a particular piece of litigation, depending on how well prepared a litigant is to deal with the discovery process.

Carriers should think about the litigation strategy implications when considering e-discovery issues. While no corporation relishes litigation, especially litigation involving its customers, insurance companies as a group are much more likely to be sued than almost any other business segment. e-Discovery obligations flow to all parties engaged in litigation. Thus, there are two ways to look at these obligations: one is defensive in nature, the other is prosecutorial. If a carrier has complied with its discovery obligations by timely preserving data, then this opens the possibility to reasonably expand discovery against opposing litigants, so that the full panoply of facts can be exposed, either to facilitate an amicable resolution or for presentation to a fact-finder.

Conclusion

The federal judiciary has generally accepted the proposition that the litigation hold process must commence at the time when a party knows or should have known that litigation is reasonably anticipated. At this milestone, the party must initiate the litigation hold process. It is important to note that this obligation applies equally to plaintiffs and defendants. Thus, in the Pension Committee case it was the plaintiffs who were sanctioned by Judge Scheindlin. The question to ask when inquiring about whether to issue a litigation hold is: What would my testimony be if I were asked whether litigation was reasonably anticipated at the time that I considered issuing the hold?

A wide disparity exists in the federal judiciary over the level of culpability necessary as a condition precedent to the imposition of sanctions for failing to timely or properly implement a litigation hold. However, once a federal court begins evaluating a party's culpability for spoliation, the party is in the unenviable position of damage control, as opposed to proactively preventing spoliation. The proper time to address e-discovery and spoliation issues is before litigation becomes reasonably foreseeable.

John Roth holds the title of Assistant General Counsel, ACE American Insurance Company, and counsels Claims in coverage and complex litigation. Thomas Jones is vice-chair of Cozen O'Connor's Global Insurance Group and co-chair of the firm's Global Electronic Discovery and Records Management Group.