The New FRCP Is Here to Stay

The recent changes to Rule 37 aim to establish standards for courts issuing sanctions as a result of e-discovery violations, dictating a more lenient stance in many cases. However, in spite of these changes, in Cat3, Magistrate Judge James C. Francis issued a sanctions order precluding the plaintiff's use of certain evidence, as well as requiring them to pay their opponents' fees and costs.

In this case, the plaintiff's original pdf production of evidence revealed discrepancies in individual e-mails, resulting in the defendant's request for a native production. When native files were produced, a forensic analysis revealed that each e-mail message had two versions, one of which favored the plaintiff's positions in the case. It was clear that unfavorable original e-mails had been deleted and replaced with a second “production-ready” e-mail, but the Plaintiffs insisted that they had not altered evidence. Even if they had, under new Rule 37(e), since misdeeds were discovered and the information recovered, there could be no sanction. CAT3 argued the defendants had “not been deprived of any information or potential evidence. Since there is no missing or destroyed evidence, sanctions cannot be properly imposed under Rule 37 or under a theory of spoliation.”

Here, Judge Francis applied a standard Rule 37(e) analysis. He determined that the plaintiff's actions clearly were an intent to deprive the defendant's use of the information. He noted that the amendment to Rule 37 is actually “more lenient as to sanctions” and allows judicial authority “for the bad faith spoliation of evidence.” He then approved sanctions, writing, “The emails are plainly 'electronically stored information.' There is no dispute that the plaintiffs were obligated to preserve them in connection with this litigation. As discussed above, information was 'lost' and cannot adequately be 'restored or replaced.' And the plaintiffs' manipulation of the e-mail addresses is not consistent with taking 'reasonable steps' to preserve the evidence.”

More interesting is that Judge Francis explained that he did not necessarily have to rely on Rule 37 to issue these sanctions. The Plaintiff's actions in altering key evidence presented to the court amounted to working a fraud on the court. Relying on Supreme Court precedent, he explained that certain judicial powers could not be “dispensed with in a Court, because they are necessary to the exercise of all others. These powers are not governed by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” One such power is the inherent authority to impose sanctions for the bad-faith spoliation of evidence. Judge Francis' decision makes it clear that courts won't be hampered by limitations inherent in Rule 37(e) in cases where the integrity of the judicial process is threatened by a party. Abuse of process won't be tolerated.

In a recent Exterro webcast, David Yerich, Esq., Director of E-Discovery at UnitedHealth Group, also weighed in on the case: “One concern is that, what if the court didn't have the power to punish wrong doers who tried to perpetrate a fraud that's outside of the scope of rule 37. So it is an appropriate action for the court to set aside the rule, invoking inherent authority, if someone is doing something knowingly to deceive a court.”

Lessons Learned

• A party's bad behavior can result in severe sanctions, even under new Rule 37(e).
• Courts must and will find a way to punish behaviors which threaten judicial processes and integrity, regardless of Rule 37(e) limitations.
• Altering data under a preservation obligation to favor your case is a bad idea. Bad-faith intent to deprive is almost conclusory if these efforts are revealed in a forensic analysis.

Case 2: Living Color Enters., Inc. v. New Era Aquaculture, Ltd. (S.D. Fla. Mar. 22, 2016)

Organizations seem to be getting a better handle on suspending document retention policies when they apply to e-mail and other company related data sources, but continue to struggle with managing text messages and other new data types, as seen in this case.

The Defendant unintentionally deleted text messages, because the auto-delete function on his phone wasn't turned off. The Plaintiff moved for sanctions, but most of text messages were available from an alternative source.

Faced with the Plaintiff's spoliation claim, the court analyzed the facts presented, based on Rule 37 (e), to determine if sanctions were justified. Magistrate Judge William Mathewman found that the information lost was ESI, for which the Defendant had an obligation to preserve and that most of the lost messages were available from an alternate source. These findings led to determining whether the Plaintiff was prejudiced by the messages that could not be found, and whether the Defendant acted with an intent to deprive. Because the Plaintiff had not explained a “direct nexus” between the missing text messages and allegations in the complaint, the court concluded that the Plaintiff had not been prejudiced. In reviewing the Defendant's actions, the court could not find any direct evidence of an intent to deprive. As a relatively unsophisticated litigant, the most that he could be found guilty of was negligence, for which sanctions are not permitted. In accordance with Rule 37, the court denied the Plaintiff's request for sanctions.

Michael Rutty, Subject Matter Expert — Alcatraz at Actiance, Inc, analyzed the case this way:

The adoption for collecting non–e-mail data types has been slow, but you are starting to see more of that happening in the last 12 months, particularly in financial services and in the pharmaceutical industry. What's interesting about this, is that we're finding we don't have the systems in place that can understand the context of text messages and social media. How can you capture an emoticon and what it really means? Can we understand a tweet or a like on social media in discovery? What if someone edits or deletes a message or a post, can we capture that in real time so that we understand the true content and context of what that means? So as the adoption of these new media types is on the rise in the business world, we're finding that not only is email no longer the only game in town, but that new and interesting things are developing in regard to the discovery of these new data types.

Test if Spoliaton Sanctions Necessary

1. Does alleged spoliation involve electronically stored information?
2. Was there a duty to preserve the allegedly spoliated ESI and did the party take reasonable steps to preserve it?
3. Can the allegedly spoliated ESI evidence be restored or replaced through additional discovery?

If the answer to all three questions is “yes,” then Rule 37(e) applies and spoliation sanctions may follow, based on finding prejudice or an intent to deprive.

If the answer to all three questions is “no,” then motions for spoliation sanctions under Rule 37 (e) must be denied.

Case 3: Nuvasive, Inc. v. Madsen Med. Inc. (S.D. Cal. Jan 26, 2016)

Nuvasive is an example that “Rules Nerds” will love. It illustrates the outcome of winning a motion while one version of a Rule is in force, only to get a very different result when the case is reviewed at a time after that Rule has been amended. In this case, “old” Rule 37(e) was in place when the case was filed, when discovery was taken, and when the trial court ruled on defendants' motion for sanctions for spoliation.

The Defendant had filed a motion for sanctions, alleging that the plaintiff had failed to preserve relevant text messages. The trial court did not make any finding that the Plaintiff had intentionally failed to preserve, but did find fault for the Plaintiff's failure to enforce compliance with its legal hold. The trial court granted an adverse instruction in favor of the Defendant's motion, which could not be given until after the trial took place. The trial was scheduled to begin after the amended Rule 37 (e) took effect.

The Plaintiff filed a motion for relief under Rule 60(b), forcing the court to assess the Defendant's claims in light of the new guidelines. Because of the timing of the trial, the appellate court ruled that the amended Rule governed. The fact that the trial court had not made any finding that the Plaintiff intentionally failed to preserve data doomed the Defendant's motion. The court pointed out: “It is clear from the language of [Rule37](e)(2) that the adverse instruction that the [trial] Court was going to give falls within the measures that are not possible absent a finding of intent.”

For a closer understanding of this case, Aaron Crews, Esq., Sr. Associate General Counsel and Head of E-Discovery, Walmart, gives some insight:

In the enabling act for the new rules, it specifically says they are to be applied in any case that occurs after the implementation of the rules, and in any case that's ongoing. Here, the court went through the analysis and determined that it was right to apply the new rule, and also in the end, it was a more just outcome, which is very much in keeping with the concepts of proportionality and the idea behind changes to 37(e).
These new rules are really designed to take some of the ambiguity out of where reasonableness starts and stops and where penalties come into play. They account for the fact that our goal and obligation when it comes to preservation is not perfection, but what is reasonable based on the facts and circumstances of a particular case. And there is a human element: We're fallible, and that's where a robust process comes into play, so that you can defend those moments by saying I did everything that was humanly and technologically possible, because I followed a process that objectively is reasonable.”

Lessons Learned

• For some cases, due to timing issues, Amended Rules may apply retroactively; providing a window of opportunity for some, while foreclosing it for others.
• Legal Teams may want to reassess their preservation processes in light of the Amended Rules

Key Takeaways

David Yerich: “Preservation fears may be lessened with more of a focus on the obligations through proportionality, so that when people come and they ask for the moon, and you want to say, 'I think that's over-burdensome,' my expectation is that it's going to be a much more nuanced conversation. I think the days of asking for everything and making general arguments are really quickly coming to a close.”

Michael Rutty: “Legal Teams should look beyond traditional e-mail toward the new data types and communication channels that are out there, and start looking at solutions that will meet those needs regarding the duty to preserve.”

Aaron Crews: “I really think the next six months, and on into the future, is going to give a lot of room to innovate how we engage in e-discovery process[es] inside of the new rules. I think we're going to see savvy lawyers teaming up with savvy clients to come up with really effective and economically efficient e-discovery processes that still adhere to our obligation in the litigation space.”

Conclusion

Even under the amended rules, Courts continue to grapple with applying bedrock e-discovery principles, like reasonableness and proportionality, in an environment being dynamically transformed by evolving communication trends and new forms of ESI. As the ruling in CAT3 v. Black Lineage shows, courts can still levy sanctions for bad-faith spoliation. The ruling in Living Color Enters., Inc. v. New Era Aquaculture underscores the effect of new data types on the discovery process and why it's vital for legal teams to stay up to date with their ability to not only preserve, but also to understand the meanings and contexts of these new data types. Just as litigants are navigating these complexities, a review of 2016 cases so far shows that courts are also adjusting to a transformed e-discovery landscape.

*****
Bob Rohlf is E-Discovery Technology Counsel at Exterro, Inc.

As expected, there have been several rulings in 2016 interpreting the FRCP e-discovery amendments which took effect in December of last year. Almost immediately after the changes were in place, new case law began discussing and redefining the concepts of proportionality and reasonableness that are laid out in Rules 26 and 37.

This article looks at three cases from the first half of 2016 that highlight the ways in which the new amendments converge with the rising need to preserve new data types, as well as how new e-discovery technology can leverage the new rules to a legal team's advantage.

Case 1: CAT3 v. Black Lineage, (S.D.N.Y. Jan. 12, 2016)

The recent changes to Rule 37 aim to establish standards for courts issuing sanctions as a result of e-discovery violations, dictating a more lenient stance in many cases. However, in spite of these changes, in Cat3, Magistrate Judge James C. Francis issued a sanctions order precluding the plaintiff's use of certain evidence, as well as requiring them to pay their opponents' fees and costs.

In this case, the plaintiff's original pdf production of evidence revealed discrepancies in individual e-mails, resulting in the defendant's request for a native production. When native files were produced, a forensic analysis revealed that each e-mail message had two versions, one of which favored the plaintiff's positions in the case. It was clear that unfavorable original e-mails had been deleted and replaced with a second “production-ready” e-mail, but the Plaintiffs insisted that they had not altered evidence. Even if they had, under new Rule 37(e), since misdeeds were discovered and the information recovered, there could be no sanction. CAT3 argued the defendants had “not been deprived of any information or potential evidence. Since there is no missing or destroyed evidence, sanctions cannot be properly imposed under Rule 37 or under a theory of spoliation.”

Here, Judge Francis applied a standard Rule 37(e) analysis. He determined that the plaintiff's actions clearly were an intent to deprive the defendant's use of the information. He noted that the amendment to Rule 37 is actually “more lenient as to sanctions” and allows judicial authority “for the bad faith spoliation of evidence.” He then approved sanctions, writing, “The emails are plainly 'electronically stored information.' There is no dispute that the plaintiffs were obligated to preserve them in connection with this litigation. As discussed above, information was 'lost' and cannot adequately be 'restored or replaced.' And the plaintiffs' manipulation of the e-mail addresses is not consistent with taking 'reasonable steps' to preserve the evidence.”

More interesting is that Judge Francis explained that he did not necessarily have to rely on Rule 37 to issue these sanctions. The Plaintiff's actions in altering key evidence presented to the court amounted to working a fraud on the court. Relying on Supreme Court precedent, he explained that certain judicial powers could not be “dispensed with in a Court, because they are necessary to the exercise of all others. These powers are not governed by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” One such power is the inherent authority to impose sanctions for the bad-faith spoliation of evidence. Judge Francis' decision makes it clear that courts won't be hampered by limitations inherent in Rule 37(e) in cases where the integrity of the judicial process is threatened by a party. Abuse of process won't be tolerated.

In a recent Exterro webcast, David Yerich, Esq., Director of E-Discovery at UnitedHealth Group, also weighed in on the case: “One concern is that, what if the court didn't have the power to punish wrong doers who tried to perpetrate a fraud that's outside of the scope of rule 37. So it is an appropriate action for the court to set aside the rule, invoking inherent authority, if someone is doing something knowingly to deceive a court.”

Lessons Learned

• A party's bad behavior can result in severe sanctions, even under new Rule 37(e).
• Courts must and will find a way to punish behaviors which threaten judicial processes and integrity, regardless of Rule 37(e) limitations.
• Altering data under a preservation obligation to favor your case is a bad idea. Bad-faith intent to deprive is almost conclusory if these efforts are revealed in a forensic analysis.

Case 2: Living Color Enters., Inc. v. New Era Aquaculture, Ltd. (S.D. Fla. Mar. 22, 2016)

Organizations seem to be getting a better handle on suspending document retention policies when they apply to e-mail and other company related data sources, but continue to struggle with managing text messages and other new data types, as seen in this case.

The Defendant unintentionally deleted text messages, because the auto-delete function on his phone wasn't turned off. The Plaintiff moved for sanctions, but most of text messages were available from an alternative source.

Faced with the Plaintiff's spoliation claim, the court analyzed the facts presented, based on Rule 37 (e), to determine if sanctions were justified. Magistrate Judge William Mathewman found that the information lost was ESI, for which the Defendant had an obligation to preserve and that most of the lost messages were available from an alternate source. These findings led to determining whether the Plaintiff was prejudiced by the messages that could not be found, and whether the Defendant acted with an intent to deprive. Because the Plaintiff had not explained a “direct nexus” between the missing text messages and allegations in the complaint, the court concluded that the Plaintiff had not been prejudiced. In reviewing the Defendant's actions, the court could not find any direct evidence of an intent to deprive. As a relatively unsophisticated litigant, the most that he could be found guilty of was negligence, for which sanctions are not permitted. In accordance with Rule 37, the court denied the Plaintiff's request for sanctions.

Michael Rutty, Subject Matter Expert — Alcatraz at Actiance, Inc, analyzed the case this way:

The adoption for collecting non–e-mail data types has been slow, but you are starting to see more of that happening in the last 12 months, particularly in financial services and in the pharmaceutical industry. What's interesting about this, is that we're finding we don't have the systems in place that can understand the context of text messages and social media. How can you capture an emoticon and what it really means? Can we understand a tweet or a like on social media in discovery? What if someone edits or deletes a message or a post, can we capture that in real time so that we understand the true content and context of what that means? So as the adoption of these new media types is on the rise in the business world, we're finding that not only is email no longer the only game in town, but that new and interesting things are developing in regard to the discovery of these new data types.

Test if Spoliaton Sanctions Necessary

1. Does alleged spoliation involve electronically stored information?
2. Was there a duty to preserve the allegedly spoliated ESI and did the party take reasonable steps to preserve it?
3. Can the allegedly spoliated ESI evidence be restored or replaced through additional discovery?

If the answer to all three questions is “yes,” then Rule 37(e) applies and spoliation sanctions may follow, based on finding prejudice or an intent to deprive.

If the answer to all three questions is “no,” then motions for spoliation sanctions under Rule 37 (e) must be denied.

Case 3: Nuvasive, Inc. v. Madsen Med. Inc. (S.D. Cal. Jan 26, 2016)

Nuvasive is an example that “Rules Nerds” will love. It illustrates the outcome of winning a motion while one version of a Rule is in force, only to get a very different result when the case is reviewed at a time after that Rule has been amended. In this case, “old” Rule 37(e) was in place when the case was filed, when discovery was taken, and when the trial court ruled on defendants' motion for sanctions for spoliation.

The Defendant had filed a motion for sanctions, alleging that the plaintiff had failed to preserve relevant text messages. The trial court did not make any finding that the Plaintiff had intentionally failed to preserve, but did find fault for the Plaintiff's failure to enforce compliance with its legal hold. The trial court granted an adverse instruction in favor of the Defendant's motion, which could not be given until after the trial took place. The trial was scheduled to begin after the amended Rule 37 (e) took effect.

The Plaintiff filed a motion for relief under Rule 60(b), forcing the court to assess the Defendant's claims in light of the new guidelines. Because of the timing of the trial, the appellate court ruled that the amended Rule governed. The fact that the trial court had not made any finding that the Plaintiff intentionally failed to preserve data doomed the Defendant's motion. The court pointed out: “It is clear from the language of [Rule37](e)(2) that the adverse instruction that the [trial] Court was going to give falls within the measures that are not possible absent a finding of intent.”

For a closer understanding of this case, Aaron Crews, Esq., Sr. Associate General Counsel and Head of E-Discovery, Walmart, gives some insight:

In the enabling act for the new rules, it specifically says they are to be applied in any case that occurs after the implementation of the rules, and in any case that's ongoing. Here, the court went through the analysis and determined that it was right to apply the new rule, and also in the end, it was a more just outcome, which is very much in keeping with the concepts of proportionality and the idea behind changes to 37(e).
These new rules are really designed to take some of the ambiguity out of where reasonableness starts and stops and where penalties come into play. They account for the fact that our goal and obligation when it comes to preservation is not perfection, but what is reasonable based on the facts and circumstances of a particular case. And there is a human element: We're fallible, and that's where a robust process comes into play, so that you can defend those moments by saying I did everything that was humanly and technologically possible, because I followed a process that objectively is reasonable.”

Lessons Learned

• For some cases, due to timing issues, Amended Rules may apply retroactively; providing a window of opportunity for some, while foreclosing it for others.
• Legal Teams may want to reassess their preservation processes in light of the Amended Rules

Key Takeaways

David Yerich: “Preservation fears may be lessened with more of a focus on the obligations through proportionality, so that when people come and they ask for the moon, and you want to say, 'I think that's over-burdensome,' my expectation is that it's going to be a much more nuanced conversation. I think the days of asking for everything and making general arguments are really quickly coming to a close.”

Michael Rutty: “Legal Teams should look beyond traditional e-mail toward the new data types and communication channels that are out there, and start looking at solutions that will meet those needs regarding the duty to preserve.”

Aaron Crews: “I really think the next six months, and on into the future, is going to give a lot of room to innovate how we engage in e-discovery process[es] inside of the new rules. I think we're going to see savvy lawyers teaming up with savvy clients to come up with really effective and economically efficient e-discovery processes that still adhere to our obligation in the litigation space.”

Conclusion

Even under the amended rules, Courts continue to grapple with applying bedrock e-discovery principles, like reasonableness and proportionality, in an environment being dynamically transformed by evolving communication trends and new forms of ESI. As the ruling in CAT3 v. Black Lineage shows, courts can still levy sanctions for bad-faith spoliation. The ruling in Living Color Enters., Inc. v. New Era Aquaculture underscores the effect of new data types on the discovery process and why it's vital for legal teams to stay up to date with their ability to not only preserve, but also to understand the meanings and contexts of these new data types. Just as litigants are navigating these complexities, a review of 2016 cases so far shows that courts are also adjusting to a transformed e-discovery landscape.

*****
Bob Rohlf is E-Discovery Technology Counsel at Exterro, Inc.