Commercial Litigation and Arbitration

Electronic Spoliation — Move Over, Morgan Stanley; Hello, Health Net

On December 6, 2006, District Judge Faith S. Hochberg — after eleven days of evidentiary hearings — found that Health Net, Inc., had engaged in repeated and serious discovery abuse, including spoliation of email and other electronic evidence, and imposed sanctions that rank up there with the partial default, adverse inference and other sanctions imposed on Morgan Stanley in its Florida imbroglio with Ronald Perlman (Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI (Palm Beach Co., Fla., Circuit Court), appeal pending).

Some highlights from the opinion in Wachtel v. Health Net, Inc., 239 F.R.D. 81 (D.N.J. 2006):

• ‛Health Net has been represented by three separate law firms at various stages of this case, and the pervasive misconduct ... was consistent throughout all stages. From the lengthy pattern of misconduct, the Court concludes that Health Net, through its own in-house counsel and top executives, was responsible for many of the egregious actions in this case.“

• ‛Defendants did not inform either Plaintiffs or the Magistrate Judge that e-mails were routinely sent to a back-up tape after 90 days; that employees generally could not search for their own e-mail older than 90 days; that deleted e-mails were lost forever upon transfer to the back-up tape; the numbers of e-mails that needed to be searched; the cost of such a search; or a plan for allocating the burden of e-mail production.“

• ‛Health Net did not even tell its outside counsel ... about its 90-day back-up tape system for storing e-mail. Therefore, outside counsel conducting discovery did not know, when Health Net's employees were asked to search e-mail, that they could only look through the most recent 90 days.“

• ‛Health Net itself did not conduct independent searches of stored emails and did not so inform its outside counsel“ at the time.

• ‛Non-production was the rule rather than the exception in this case.“

• ‛Health Net's process for responding to discovery requests was utterly inadequate, relying on an in-house paralegal also responsible for approximately 60 other cases.“

• ‛Defendants' boilerplate ‘burdensome’ objections did not excuse their obligations to produce e-mails within their possession after Plaintiffs contested the inadequate production and Magistrate Judge Shwartz ruled on them in Plaintiffs' favor.... Health Net ... unilaterally decided that if the Magistrate Judge did not expressly state that she was ruling on their ‘burdensome’ objections, they could continue to withhold documents. Health Net never told the Magistrate Judge that it was not complying with her discovery orders in this fashion — it just withheld documents.“

• ‛[T]he ‘meet and confer’ process was compromised by Health Net's wilful failure to identify to the Plaintiffs the full range of documents that were responsive to Plaintiffs' document requests.“

• ‛Defendants gave approximately 20,000 pages of previously unproduced discovery to Plaintiffs in the form of documents attached to certifications in support of Health Net's ... motion for summary judgment and as designated trial exhibits.“

Judge Hochberg imposed sanctions under both Fed.R.Civ.P. 37 and the inherent power of the Court. She reserved as to whether to impose a default judgment but immediately imposed the following sanctions:

1. Deeming facts admitted under Rule 37(b)(2)(A), including Health Net’s knowing and intentional use of outdated data to calculate the usual, customary and reasonable charges for medical procedures; its deception of the New Jersey Department of Banking and Insurance on this score; and various false statements and a false affidavit submitted to the Court.

2. Precluding unproduced evidence and late-designated witnesses pursuant to Rules 37(c)(1) and 37(b)(2)(B).

3. Striking numerous privilege logs’ assertions of privilege pursuant to Rule 26(b)(5).

4. Imposing monetary sanctions in an amount to be determined following the submission by plaintiffs of evidence of their litigation costs in connection with the eleven-day sanctions hearing and all other efforts to compel discovery after the entry of a court order mandating that discovery.

5. Imposition of a fine following the Court’s review of recent SEC filings of Health Net.

Quotable line for future use: ‛When the abuses are as extreme as they are in this case, to refrain from sanctions is unfair to the parties who conduct themselves according to the rules.“

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