Commercial Litigation and Arbitration

Spoliation: Truth or Consequences

Spoliation: Truth or Consequences

Gregory P. Joseph*

I. Electronic Spoliation

A. Negligence Standard: Residential Funding & Sequelae

The lasting legal legacy of the current era of electronic discovery likely will lie in the area of spoliation and sanctions. Lawyers know how to review, shepherd and maintain paper. Electronic data are another matter. Mere negligence in preserving or promptly producing electronic information is sanctionable, and even hiring and heeding electronic data experts is no guarantee that sanctions will be avoided.

That is the teaching of the Second Circuit’s decision in Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002). Residential Funding holds that negligent delay — not destruction, merely delay — in producing electronic data is sanctionable, and that, on the facts, the non-producing party’s reliance on an outside expert firm (hired to retrieve the data that was sought) was not necessarily a defense to sanctions. A notable aspect of this decision lies in the evident need the Court felt to set strict parameters to govern behavior in this area. It applied a negligence standard without even addressing a key Federal Rule of Civil Procedure that had been triggered and would have contemplated the imposition of sanctions for negligence. The Court relied instead on a power that requires a showing of bad faith — yet, under the Court’s holding, bad faith need not be shown.

It should be stressed that other Circuits, unlike the Second, do require a showing of bad faith before an adverse inference for spoliation is appropriate. See, e.g., Greyhound Lines, Inc. v. Wade, 2007 U.S. App. LEXIS 9282 (8th Cir. April 24, 2007); Aramburu v. Boeing Co., 112 F.3d 1398, 1407 (10th Cir. 1997); Cache La Poudre Feeds, LLC v. Land O'Lakes Farmland Feed, LLC, 2007 U.S. Dist. LEXIS 15277, at *74-*75 (D. Colo. 2007). The influence of Residential Funding, however, is growing. It been followed by a number of district courts, the Nevada Supreme Court and the Sixth Circuit. World Courier v. Barone, 2007 U.S. Dist. LEXIS 31714 (N.D. Cal. April 16, 2007); Teague v. Target Corp., 2007 U.S. Dist. LEXIS 25368 (W.D.N.C. April 3, 2007); Samsung Elecs. Co. v. Rambus Inc., 439 F. Supp. 2d 524, 540 (E.D. Va. 2006); Consol. Aluminum Corp. v. Alcoa, Inc., 2006 U.S. Dist. LEXIS 66642 (M.D. La. July 19, 2006); Bass-Davis v. Davis, 134 P.3d 103, 107 (Nev. 2006); One Beacon Ins. Co. v. Broad. Dev. Group, Inc., 147 Fed. Appx. 535, 540-541 (6th Cir. 2005) (unpublished). Consequently, its ramifications are important.

The plaintiff in Residential Funding won a $96.4 million jury verdict. The defendant’s sole ground for reversal on appeal was the trial court’s denial of a defense motion for sanctions — seeking an adverse inference instruction —to redress the plaintiff’s failure to produce voluminous email until after trial had begun. The plaintiff claimed, and the trial court evidently accepted, that the email was produced belatedly because plaintiff’s outside expert was unable to retrieve it from backup tapes which the plaintiff provided to the defense as the jury was empanelled. Id. at 110 n.5. (The appeals court seemed skeptical about this explanation since the defense expert was able to retrieve hundreds of thousands of emails within four days of receipt of the backup tapes.)

In the absence of bad faith or gross negligence, the trial court declined to sanction the plaintiff and rejected the adverse inference instruction. The Second Circuit vacated the order denying sanctions and held that even negligently-delayed production is sanctionable and subject to an adverse-inference instruction. It ordered vacatur even though there was no showing that the unproduced email contained any damning evidence — indeed, the trial court had invited the defendants to move for a new trial if any were discovered. No such motion evidently was made.

The Residential Funding Court’s legal analysis has broad implications. The Court looked first to Fed.R.Civ.P. 37(b)(2), because the belated production of the electronic discovery at some point transgressed an order of the lower court. Rule 37(b)(2) provides that simple ‛fail[ure] to obey an order to provide or permit discovery“ suffices to support a sanctions award. Consequently, there is nothing remarkable about the Court’s holding that disobedience of a valid discovery order is sanctionable even if the offender claims that the failure to obey was negligent rather than intentional. The offender’s state of mind may affect the severity of the sanction that is apt, however. See generally Joseph, Sanctions: The Federal Law of Litigation Abuse §§48-49 (3d ed. 2000; Supp. 2007).

Further, while an adverse-inference instruction is not specifically identified as a permissible sanction in Rule 37(b)(2), the Second Circuit seemed to view it as a lesser-included of deeming ‛matters ... to be established“ (Rule 37(b)(2)(A)). See 306 F.3d at 106-07. In all events, the Court stressed that Rule 37(b)(2) authorizes the trial judge to ‛make such orders in regard to the failure as are just,“ and this has long been held to support an adverse-inference instruction in appropriate circumstances. Joseph, Sanctions at §49(A).

This analysis, however, all addresses only the situation in which a court has ordered production. Is an adverse inference instruction available for negligent non-production in the absence of a court order? The Residential Funding Court held that it is, observing that, even in the absence of a court order, sanctions are awardable for dilatory discovery tactics, citing the inherent power of the court as the source of this sanctioning power. 306 F.3d at 107. Inherent-power sanctions, however, require a showing of bad faith. Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (‛the narrow exceptions to the American Rule effectively limit a court’s inherent power to impose attorneys’ fees as a sanction to cases in which a litigant has engaged in bad-faith conduct or willful disobedience of a court’s orders“). The Second Circuit did not discuss this prerequisite, and it would appear to be incompatible with a sanction based on negligence, in the absence of court order.

An alternative source of sanctioning power in this circumstance, however — and one not requiring any showing of bad faith — is Rule 37(c)(1). As amended effective December 2000 (and fully applicable in Residential Funding), Rule 37(c)(1) provides that a failure to supplement discovery responses seasonably (as required by Rule 26(e)(2)) triggers a presumptive exclusion of the unproduced evidence (not helpful in Residential Funding) and authorizes the trial judge to ‛impose other appropriate sanctions ... and may include informing the jury of the failure to make the disclosure.“ This is essentially what the defendant in Residential Funding sought, but it does not appear from the opinion that anyone called this rule to the attention of the Court. In any event, while the Second Circuit did not address it, this Rule supports the result reached by the Court.

Under Residential Funding, an adverse-inference instruction is available for either spoliation or delayed production if three criteria are satisfied:

1. a party had an obligation to preserve or produce the evidence;

2. that party failed to do so with ‛with a culpable state of mind;“ and

3. the destroyed or missing evidence was ‛relevant“ to the claim or defense of the other party seeking discovery such that a reasonable trier of fact could find that it would support the claim or defense (ultimately this is a jury issue).

Id. at 107-08.

Residential Funding expanded the ‛culpable state of mind“ (factor (2)) to encompass negligence, reasoning that: ‛The sanction of an adverse inference may be appropriate in some cases involving the negligent destruction of evidence because each party should bear the risk of its own negligence.“ Id. at 108 (citing U.S. Magistrate Judge James C. Francis, IV).

As for factor (3), the Residential Funding Court set the bar of ‛relevance“ above that set by Fed. R. Evid. 401, requiring that the party seeking the adverse inference adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence ‛would have been of the nature alleged by the party affected by its destruction“ or non-production. At the same time, the Second Circuit stressed that courts should not hold the victim of non-production ‛to too strict a standard of proof“ because to do so would ‛subvert the ... purposes of the adverse inference“ and profit from their misconduct. Id. at 108-09.

The Court emphasized that, if bad faith or gross negligence is shown, that, alone, is usually sufficient evidence of relevance to go to the jury with an adverse inference instruction. Id. at 109. It also stressed that bad faith or gross negligence (as well as simple negligence) may be shown by proof that a party failed to hire an expert to assist with electronic production as soon as the party realized that it could not retrieve potentially responsive data on its own. The Residential Funding Court added that continued reliance on an expert who is not producing results may also give rise to an inference of a ‛culpable state of mind.“ Id. at 111. As trial approaches and the need for prompt production escalates, the Second Circuit held, ‛purposefully sluggish“ acts may be sufficient to warrant the imposition of sanctions, including an adverse inference instruction. Id. at 112.

The influence of Residential Funding is even more pervasive than the citations on page 2 reflect. It essentially dictated Judge Shira A. Scheindlin’s insightful, well-reasoned and extremely influential line of decisions in Zubulake.[1] Thus, Residential Funding, alone, has several practical repercussions for electronic discovery practice that have now become commonplace:

First, to avoid any prospect of sanctions, it is essential to address the issue of electronic data preservation at the inception of the case (which, for the plaintiff, precedes filing). It is necessary to take early, reasonable steps to ensure the protection of potentially responsive data because the negligence rationale of Residential Funding — as it applies to document destruction — is not limited to the period that commences with service of a document demand. The 2006 electronic discovery amendments to Fed.R.Civ.P. 16 and 26(f) have codified a reminder to attend to electronic discovery issues at the outset of the litigation — but that may be long after the preservation duty has attached.

Second, while there is no reason why counsel may not rely on a client to furnish the needed electronic expertise, it is not enough — whether the expert is in-house or outside — simply to rely on a statement of the expert that discovery demands cannot be honored because the expert is unable to retrieve the data that is sought. If the expert is in-house, moreover, any claim of inability is inherently suspect and will be subject to greater attack if the adversary’s expert proves able to retrieve the data. After the expert has been engaged, counsel must monitor the expert’s progress and, if he or she cannot retrieve the data from the underlying source, then counsel will have to consider whether supplemental expert assistance is required or whether the data source should be made accessible to the opponent (either directly or perhaps through an intermediary firm, if that is essential to preserve confidentiality of unresponsive data).

Third, while discovery is ordinarily frowned upon on sanctions motions, the issue of retrievability and relevance of unproduced data may be discoverable. The Second Circuit remanded for discovery in Residential Funding, specifically allowing depositions of affiants proffered by the non-producing party below. Id. at 112. (The case then settled, of course.)

Fourth, the fact that the missing electronic data proves to be irrelevant in fact is not necessarily a complete defense to sanctions — it is a defense to the sanction of an adverse inference (or, presumably, any harsher sanction). The Court may still impose a lesser sanction, such as an award of fees incurred in bringing the sanctions motion or, if there is an appeal, as in Residential Funding, the court may sanction a successful litigant by denying it post-judgment interest (where, as in Residential Funding, the delay produced by the appeal on the discovery/sanctions issue is deemed a product of the sanctionable behavior). Id. at 112-113. Many courts now recognize a sliding scale such that the greater the culpability, the lesser the requisite relevance — and, conversely, the lesser the culpability, the higher the requisite relevance (as in Residential Funding, itself).

Fifth, just as the irrelevance in fact of the unproduced data is not a complete defense to sanctions, nor is the fact that the non-production is not made ‛with a culpable state of mind.“ The absence of a culpable state of mind will not preclude the imposition of an appropriate sanction other (and lesser) than an adverse inference, such as an award of fees and costs. Non-production, alone, is sanctionable, under both Rules 37(b) (if it flouts an outstanding order of the court) or 37(c)(1) (even in the absence of an order).

B. Pervasive Misconduct: 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), rev’d on other grounds, No. 4D05-2606 (Fla. Dist. Ct. App. Mar. 21, 2007), motions for rehearing, rehearing en banc and certification 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.“ Id. at 86.

· ‛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.“ Id. at 91 n.23.

· ‛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.“ Id. at 91.

· ‛Health Net itself did not conduct independent searches of stored emails and did not so inform its outside counsel“ at the time. Id. at 103.

· ‛Non-production was the rule rather than the exception in this case.“ Id. at 92.

· ‛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.“ Id. at 92.

· ‛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.“ Id. at 93.

· ‛[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.“ Id. at 94.

· ‛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.“ Id. at 104.

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.

In a pithy quote that will likely be repeated, she concluded: ‛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.“ Id. at 84.

C. Duties of Counsel & Client: Land O’Lakes

When must a litigation hold be implemented? How explicit must a pre-litigation warning be? The only way to insure that the duty to preserve evidence has been triggered is to demand it. Consider Cache Poudre Feeds, LLC v. Land O’Lakes Inc., 2007 U.S. Dist. LEXIS 15277 (D. Colo. March 2, 2007). In April and June of 2002, plaintiff’s counsel telephoned and wrote the defendant’s general counsel that the plaintiff had been using the PROFILE mark for animal feeds for more than a decade (the defendant had recently begun to do so) and to express concern over the possibility of customer confusion. In her June 2002 letter, plaintiff’s counsel (i) warned that the defendant’s use of the mark ‛may become a very serious problem,“ (ii) explicitly ‛put [defendant] on notice of our client’s trademark rights“ and defendant’s ‛exposure,“ and (iii) sought ‛to determine whether this situation can be resolved without litigation.“ She did not demand that evidence be preserved.

A year later, in June 2003, more correspondence, and the parties again considered a negotiated resolution. Discussions faltered and litigation was commenced on February 24, 2004. Throughout the pre-filing period, defendant did not institute a litigation hold, and only did so shortly after the litigation was commenced. Held, this was permissible under the circumstances. In the Court’s words:

Rather than threatening impending litigation, [plaintiff’s counsel’s June 2002] letter implied that her client preferred and was willing to explore a negotiated resolution…. [Her] correspondence in 2003 also did not include a demand for preservation of evidence. Given the dynamic nature of electronically stored information, prudent counsel would be wise to ensure that a demand letter sent to a putative party also addresses any contemporaneous preservation obligations…. [Id. at 26.]

[A] party’s duty to preserve evidence in advance of litigation must be predicated on something more than an equivocal statement of discontent, particularly when that discontent does not crystallize into litigation for nearly two years. Any other conclusion would confront a putative litigant with an intractable dilemma: either preserve voluminous records for a[n] indefinite period at potentially great expense, or continue routine document management practices and risk a spoliation claim at some pointing the future. [Id. at 30.]

The Court’s analysis of several other issues of interest:

1. A party may have a duty to contact former employees to see if they possess relevant documents, as where the employee is still receiving compensation from the party, but if the former employer disclaims any financial or other relationship of control over the former employee’s documents, the burden is on the proponent of discovery to establish that its adversary has does have such control.

2. A number of alleged defalcations were forgiven because of the overbreadth of the pertinent discovery requests (the defendants objected on overbreadth grounds).

3. It was improper for the defendant to continue its practice of expunging the hard drives of relevant employees as they left the company following the filing of the litigation where there was no other storage of, or means to retrieve, the information contained on those hard drives.

4. It is insufficient simply to send out a litigation hold notification and to receive documents forwarded from relevant individuals without taking any ‛independent action to verify the completeness of the employees’ document production.“

$5,000 in sanctions plus certain court reporter costs were imposed on defendant.

D. Electronic Spoliation by Third Party: NTL and World Courier

That a party may not spoliate with impunity is well settled. A party may also be sanctioned for spoliation committed by a stranger to the litigation, in appropriate circumstances.

NTL. The defendant in In re NTL, Inc., Sec. Litig., 2007 U.S. Dist. LEXIS 6198 (S.D.N.Y. Jan. 30, 2007), did not have physical custody of the electronically-stored information that was lost, but it was subjected to an adverse inference because that information had been in its ‛control“ and — in the no-good-deed-goes-unpunished department — litigation hold memos circulated years earlier demonstrated awareness of the need to preserve the data. Facts in three sentences: This securities fraud class action was commenced before NTL, Inc., went into bankruptcy. Two entities emerged — the liability for the lawsuit was left with one of them (NTL Europe, the defendant), but all documents and electronically-stored information went to the other (New NTL, a non-party), together with the operating business. New NTL did a computer upgrade which decimated a great deal of electronically-stored information.

Magistrate Judge Andrew Peck found that defendant NTL Europe had control over the documents and electronically-stored information for three independent reasons: (1) it would be patently unfair to allow the post-bankruptcy structure that the defendants were involved in arranging to frustrate discovery; (2) a demerger agreement between the entities entitled defendant NTL Europe to access to the documents and electronically-stored information, and (3) the duty to preserve was triggered prior to the separation of old NTL into the two new entities and, in this setting, if defendant NTL Europe failed to preserver access to the documents under the demerger agreement, that would by definition constitute an inadequate litigation hold on the part of the defendant.

The NTL opinion conveniently sets out Second Circuit spoliation law. Where a party destroys potential evidence (1) in bad faith or (2) through gross negligence, that, alone, may justify an adverse inference instruction. If the party acts (3) negligently, an adverse inference instruction requires extrinsic evidence tending to demonstrate that the missing evidence would have been favorable to the movant. Held, gross negligence, at a minimum, was established, ‛an adverse inference instruction spoliation sanction against defendant NTL Europe is warranted in this case“ and ‛[t]his Court will consider the adverse inference when issuing its Report and Recommendation on defendant NTL Europe's pending summary judgment motion.“ Note: Attorneys’ fees were also awarded.

World Courier. Defendant Doneen Barone in World Courier v. Barone, 2007 U.S. Dist. LEXIS 31714 (N.D. Cal. April 16, 2007), did not destroy the hard drive that contained relevant evidence — her husband did. Defendants argued that they could not be sanctioned because the spoliator was not a party to the action. District Judge Thelton E. Henderson rejected this argument on three grounds: (1) ‛it overlooks a party’s affirmative duty to preserve relevant evidence both prior to and during trial;“ (2) ‛courts have extended the affirmative duty to preserve evidence to instances when that evidence is not directly within the party’s custody or control so long as the party has access to or indirect control over such evidence;“ and (3) ‛it is difficult to imagine a scenario in which a husband would secretly create a copy of, and subsequently destroy, a hard drive relating to his spouse’s pending legal matters and professional career without any knowledge, support or involvement of his wife.“ Held, adverse inference instruction and monetary sanctions to be imposed.

A party’s exposure for third party spoliation is, as these cases teach, a function of the facts before the Court. It may also be a function of the breadth with which the phrase ‛possession, custody and control“ — contained in Fed.R.Civ.P. 34 — is construed. And it is construed broadly. See, e.g., United States v. Stein, 2007 U.S. Dist. LEXIS 31513 (S.D.N.Y. May 1, 2007) (Party A serves a document demand on Party B. Party B has the unconditional right, by contract, to obtain responsive documents held by Party C. Held, the documents in the possession of Party C are in Party B’s ‛possession, custody or control“ within the meaning of Fed.R.Civ.P. 34).

E. Can a Computer Crash Constitute Spoliation?

Perhaps. Plaintiffs’ counsel in Thompson v Jiffy Lube Int’l, Inc., 2007 U.S. Dist. LEXIS 13078 (D. Kan. Feb. 22, 2007), was unable to comply with court-ordered discovery because, in counsel’s words, ‛in December 2005, my hard drive crashed and I lost a lot of data that had not been backed up and [the data at issue] were there.“ The defendants contended the plaintiffs' failure to back up this information amounted to spoliation. The Thompson Court reserved the issue for future determination, but its analysis is appropriately ominous. There is little doubt that a failure to act reasonably to preserve relevant evidence may subject counsel or client to spoliation sanctions, and there is no reason why this analysis is inapplicable to a failure to take reasonable precautions to preserve relevant evidence that exists only a laptop. It is not as though anyone who owns a laptop lacks a disaster story or two.

F. No Good Deed Goes Unpunished

A State Farm policyholder had a serious home fire caused by a defective kitchen appliance. State Farm responded within a day and sent in a fire investigator who determined that a toaster oven instigated the fire. State Farm preserved the toaster oven and other potential igniters and authorized a demolition repair company to come in promptly and repair the damage, undoubtedly to the great relief of the homeowners. At the time it did this, however, State Farm hadn't determined who manufactured the defective toaster oven. State Farm therefore did not delay the home repair until it had determined the manufacturer (it was Black & Decker), notified it, and afforded B&D an opportunity to inspect the scene. After paying the claim, State Farm commenced a subrogation action.

The District Judge in Hughes v. Black & Decker, 2007 U.S. Dist. LEXIS 2372 (D. Minn. Jan. 10, 2007), viewed the home repair as spoliation of the scene of the fire. The Court accepted that State Farm acted in good faith and reasoned that Eighth Circuit precedent precluded either a dismissal or adverse-inference instruction absent bad faith. This, the Court felt, presented it with a conundrum, considering itself hamstrung in applying an appropriate sanction. State Farm presented a solution by stipulating to an adverse-inference instruction, even in the absence of a finding of bad faith, and consenting to the preclusion of any testimony from its investigator who inspected the scene.

Some cases do not merit severe sanctions, and an appropriate sanction can be hard to find. In the abstract, it is difficult to see why preclusion of the testimony alone was not sufficient -- all experts would then be left with the photographic evidence and the remains to deal with. The fact of the home repair, and destruction of the scene, would always be admissible. But an adverse inference instruction seems harsh on these facts, although State Farm's acquiescence suggests that there may be more involved than appears in the opinion. (Was an adequate video record of the scene made? Could any video be accurate?). Insurance companies do not need legal disincentives to pay claims.

G. Federal Rule of Civil Procedure 37(f)

Effective December 1, 2006, Federal Rule of Civil Procedure 37(f) provides:

Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good faith operation of an electronic information system.

There are at least three important aspect of this amendment.

First, the ‛exceptional circumstances“ standard is extremely difficult to satisfy. It appears only three places in the Federal Rules of Civil Procedure (Rules 11(c)(1)(A) (why law firm should not be sanctioned if a partner is), 26(b)(4)(B) (discovery of non-testifying experts) and 32(a)(3)(E) (use of deposition in lieu of live testimony other than in specified circumstances)), and it is rarely met. Therefore, when the safe harbor is triggered, it is highly unlikely that sanctions will issue.

Second, the exclusive focus on routine deletion of data is problematic. This will change commercial behavior. Parties who are routinely sued will accelerate the routine deletion of data. Insurance companies will insist on it. It is far from clear why a rule should encourage data destruction. Moreover, there are many other reasons why data disappears over time, and this amendment could be read to suggest that, if a party fails to provide electronic information for any other reason, sanctions might be appropriate. Suppose that, early in the litigation, all relevant data have been housed on special servers but the servers are destroyed through no fault of the producing party (Hurricane Katrina). That certainly is not sanctionable.

Third, there is no clear need for this safe harbor. No cases have been cited showing that sanctions are properly imposable under any sanctions power as a ‛result of the routine, good faith operation of an electronic information system.“ Is the failure to comply with a corporate policy requiring retention of data once a litigation has commenced or a subpoena served evidence of bad faith, or just negligence? Does the ‛routine operation of an electronic information system“ include the programmers who set the routines? Does it include the human actions of taking old backup tapes and recycling them?

Note that this safe harbor does not protect against the imposition of sanctions for falsely certifying compliance with a Rule 34 request (in a response) or with a Rule 37(a) order compelling production. These are the provisions under which sanctions ordinarily issue.

II. Spoliation: Privilege Implications

Most lawyers operate on the assumption that, when they talk to their clients about electronic discovery issues, those discussions are privileged. This protection is most important when the client’s conduct as to preservation is put at issue. The Third Circuit’s decision in In re Grand Jury Investigation, 445 F.3d 266 (2006), suggests that the privilege may no longer provide protection in these circumstances — precisely when the client needs it most.

The government, in In re Grand Jury Investigation, subpoenaed email from a company. Company counsel explained the scope and requirements of the subpoena to the executive director of the company. The government contended that the executive director ‛failed to use her position as an executive of the organization to direct that all email deletion stop immediately.“ Id. at 279. The government then subpoenaed counsel’s emails to the executive director and notes of counsel’s conversations with her explaining the subpoena.

There was no suggestion of wrongdoing by counsel. Nonetheless, the Court ordered disclosure of the privileged communications under the crime-fraud exception to the attorney-client privilege.

The Third Circuit applied the two-part test of crime-fraud exception:

The government must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.

Id. at 278.

The government made a prima facie showing as to prong (1) — that the client was committing or intending to commit a fraud or crime (namely, obstruction). The nature of that factual showing is not reported, but it is very common that an adversary can identify discrepancies in production that could give rise to an inference of data deletion or inadequate preservation.

The harder question concerned prong (2) — whether counsel’s communications were made ‛in furtherance“ of the alleged crime or fraud. The Third Circuit reasoned that the lawyer’s communications concerning the contents of the subpoena furthered the crime of obstruction because they provided the client with knowledge of the type of material the government sought.

[I]f Jane Doe learned of the Government’s interest in certain documents from her [communications with company counsel] and subsequently acquiesced in the deletion or destruction of those documents, the second prong of the crime-fraud exception would be satisfied.

Id. at 279.

The duties imposed by the subpoena in In re Grand Jury are analytically no different than those imposed by subpoenae or document requests served in civil actions every day. Additionally, the doctrine of obstruction that was applied in In re Grand Jury is equally applicable in civil cases — as a former President learned to his chagrin. Jones v. Clinton, 36 F.Supp.2d 1118, 1127 (E.D. Ark. 1999).

If counsel’s communications in In re Grand Jury ‛furthered“ the client’s misconduct, they did so in only a weak sense — that the client needed to know the requirement in order to break it. What if the client decided only after the communication to engage in document destruction and had no such intent at the time? Could counsel’s earlier communications in any meaningful sense be deemed to have ‛furthered“ uncontemplated misconduct? Did it do so retroactively?

Tellingly, the executive director in In re Grand Jury had not claimed ignorance of the subpoena and put counsel’s advice at issue. The alleged crime, alone, made counsel’s communications relevant.

Therefore, this is potentially a very broad ruling. Under the Third Circuit’s analysis, any crime or fraud by a client that consists of a violation of a stricture communicated by counsel may waive the privilege as to the communication stating the stricture. This analysis potentially extends beyond electronic discovery to advice concerning disclosure obligations of all sorts — including disclosures to governmental authorities, to counter-parties in transactions, and to business partners.

III. Expert Spoliation

Can a lawyer properly instruct his or her experts to destroy drafts of their reports as they are working toward the final? Does it matter whether those drafts bear or reflect the comments of others? What if the comments reflected on the drafts are counsel’s? Must communications with experts — including counsel/expert emails —be preserved? Are counsel’s notes of conversations with their own experts discoverable?

We live in an era of spoliation. Parties long not so much for documentary evidence as for evidence that documents have been destroyed. This article explores the application of spoliation principles to expert-related materials.

The threshold question is whether the materials are discoverable. If so, there is necessarily a duty to preserve them since by definition there is a pending or reasonably foreseeable lawsuit. West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999).

Impact of Report Requirement. The discoverability of expert-related materials turns largely on an analysis of Fed. R. Civ. P. 26(a)(2)(B), the expert report requirement added in 1993. This Rule mandates disclosure not only of ‛a complete statement of all opinions“ but also of ‛the data or other information considered by the witness in forming the opinions.“ The critical word is ‛considered.“ The 1991 draft of this rule originally proposed ‛relied,“ but that was deleted as too restrictive.

‛‘Considered,’ which simply means ‘to take into account,’ clearly invokes a broader spectrum of thought than the phrase ‘relied upon,’ which requires dependence on the information.“ Karn v. Ingersoll Rand, 168 F.R.D. 633, 639 (N.D. Ind. 1996) (‛considered“ is satisfied where experts have ‛reviewed“ documents ‛related to the subject matter of the litigation ... in connection with forming their opinions“). The 1993 Advisory Committee Note to Rule 26(a)(2)(B) observes that: ‛Given the obligation of disclosure, litigants should no longer be able to argue the materials furnished to their experts to be used in forming their opinions are protected from disclosure when such persons are testifying or being deposed.“

Therefore, matters considered by experts are generally disclosable in their reports and, therefore, discoverable. This includes documents provided by counsel to the expert and the expert’s draft reports and notes. Corrigan v. Methodist Hosp., 158 F.R.D. 54, 58 (E.D. Pa. 1994); Ladd Furniture v. Ernst & Young, 1998 U.S. Dist. LEXIS 17345 at *34 (M.D.N.C. Aug. 27, 1998); Hewlett-Packard v. Bausch & Lomb, 116 F.R.D. 533, 537 (N.D. Cal. 1997). In the words of the Sixth Circuit: ‛Rule 26 creates a bright-line rule mandating disclosure of all documents, including attorney opinion work product, given to testifying experts.“ Regional Airport Auth. v. LFG, LLC, 460 F.3d 697, 717 (6th Cir. 2006).

Consequently, ordering experts to destroy drafts and notes is generally sanctionable. W.R. Grace & Co. v. Zotos Int’l, Inc., 2000 WL 1843258 at *10-*11 (W.D.N.Y. Nov. 2, 2000). There are, however, a series of open issues — and a fundamental question whether this result is always the right one.

Comments of Consulting Experts. What if the drafts bear the comments of non-testifying, consulting experts, whose work product is generally non-discoverable, subject to the ‛exceptional circumstances“ test of Rule 26(b)(4)?

An important 2001 opinion, Trigon Ins. Co. v. United States, 204 F.R.D. 277 (E.D. Va. 2001), holds this material discoverable. The defendant in Trigon retained a respected litigation consulting firm to supply experts (third-party academics) and to assist those experts in preparing their reports. The consulting firm and its principals remained non-testifying experts. The plaintiff sought all drafts worked up between the testifying experts and the consulting firm — and all communications (including email traffic) between them — much of which had not been preserved.

The Trigon Court held that since the drafts and substantive emails had been ‛considered“ by the testifying experts in forming their opinions, the materials were discoverable. Trigon further ruled that the destruction of these materials was sanctionable because it was intentional, and that spoliation remedies attached regardless of whether the defendant acted in bad faith. The Court did not preclude the experts’ testimony because that would have interposed a delay prejudicial to the plaintiff (the court would have permitted the defendant to engage new experts). Instead, the Trigon Court ordered the defendant to engage an outside technology consultant to retrieve as much of this data as possible — with the plaintiff’s full participation in the process — and held it ‛appropriate to draw adverse inferences respecting the substantive testimony and credibility of the experts.“ Id. at 291.

In a late 2002 opinion, the Trigon Court also awarded the plaintiff more then $179,000 in fees and costs attributable to the spoliation. Trigon Ins. Co. v. United States, 2002 U.S. Dist. LEXIS 24782 at *7 (Dec. 17, 2002).

Interestingly, at the same time that it found sanctionable the destruction of drafts bearing the comments of other experts, the Trigon opinion stressed that it was not deciding ‛whether a testifying expert is required to retain, and a party is required to disclose, the drafts prepared solely by [the testifying] expert while formulating the proper language in which to articulate that experts’ own, ultimate opinion arrived at by the expert’s own work or those working at the expert’s personal direction“ and that ‛[t]here are cogent reasons which militate against such a requirement....“ 204 F.R.D. at 283 n.8.

These cogent reasons were not specified, and, as noted above, other cases expressly allow discovery of draft reports and notes. At least one federal judge has issued a Standing Order requiring their production. See Supplemental Order to Order Setting Case Management Conference in Civil Cases Before Judge William Alsup at ¶15 (N.D. Cal. November 25, 2002).

However, there are cogent reasons why the Advisory Committee should reconsider whether this is the optimal result. Every carefully-drafted document has false starts. The quality of the final is not judged by the quantity or quality of the drafts. That is true of judicial opinions and briefs as well as expert reports. For the expert to formulate a reasoned opinion, he or she should be afforded the latitude to filter the facts through the prism of his or her expertise — using whatever process seems most appropriate — without intrusion and without the necessity of attempting to avoid committing matters to writing. If the concern is ghost-writing or undue influence by others, a party should be required to make a prima facie showing that validates that concern before piercing the report and opening underlying matters to discovery.

Regrettably, the proposed distinction in Trigon between the work-product generated by ‛those working at the expert’s personal direction“ and that of the outside consulting litigation firm is also difficult to sustain under Rule 26(a)(2)(B). Moreover, if it were sustained, the expert industry would no doubt be restructured so that experts relied only on ‛employees.“ But if the relevant concern is ghost-writing, there is no obvious reason why the courts should treat ghost-writing by employees differently from that of third-parties. The element of personal direction is really the key, and the question is always the same — whether the expert is giving the direction or receiving it. Is there a genuine issue as to just whose opinion the expert is espousing?

Counsel’s Comments/Communications with Expert. The discoverability of communications between counsel and experts has split the courts since 1993. See generally 6 Moore’s Federal Practice § 26.80[1][a] (3d ed. 2007). The technical issue is whether the protection for opinion work product set forth in Rule 26(b)(3) is trumped by the disclosure requirement of Rule 26(a)(2)(B). Many courts, like Karn, hold that it is and that all communications between counsel and the expert are discoverable. Others, following Haworth, Inc. v. Herman Miller, Inc., 162 F.R.D. 289 (W.D. Mich. 1995), come to the opposite conclusion. I have advocated the latter position (Emerging Expert Issues Under the 1993 Disclosure Amendments to the Federal Rules of Civil Procedure, 164 F.R.D. 97 (1996)), but the trend of decisions appears now to favor the Karn approach. While that approach fairly addresses the perceived need to explore the basis of the expert’s opinion, it is overly broad — capturing every exchange between counsel and the expert, regardless of the substance and regardless of whether there is any doubt that the opinion is in all respects that of the witness. This result operates to favor those litigants who can afford separate consulting experts off whom, for example, counsel may bounce ideas as to cross of opposing experts and trial strategy.

In those jurisdictions following the Karn approach, drafts of expert reports bearing counsel’s comments are discoverable. Weil v. Long Island Savings Bank, 206 F.R.D. 38 (E.D.N.Y. 2001). There is the further question of the discoverability of counsel’s notes reflecting oral communications with the expert. This is one step removed from the actual communications — assuming that the expert has never seen the notes — and necessarily implicates serious opinion work product concerns. The notes should be deemed immune from discovery, absent a prima facie showing of that (1) they reflect either misconduct or ghost-writing by counsel or form an important basis of the expert’s opinion, and (2) cannot be recreated in any other way (e.g., from testimony from the expert). Some courts have properly shown some reticence in ordering production of such notes. See, e.g., B.C.F. Oil Refining v. Consol. Edison Co. of N.Y., 171 F.R.D. 57, 66-67 (S.D.N.Y. 1997). W.R. Grace, 2000 WL 1843258 at *5; Amster v. Tiver Capital Int’l Group, 2002 U.S. Dist. LEXIS 13669 (S.D.N.Y. July 26, 2002).

Does the Destruction Merit Sanctions? Sometimes, cross-examination alone may be a sufficient remedy for spoliation, if the spoliation is trivial enough. For example, Loveless v. John’s Ford, Inc., 2007 U.S. App. LEXIS 11001 (4th Cir. 2007), an ADEA action, the plaintiff’s damages expert was called to testify as to the plaintiff’s loss of income. After the expert gathered earnings information by hand from the corporate defendant’s records, he transferred the data to his computer and discarded the notes. The defendant cross-examined the expert on his destruction of the notes, but the District Court refused to preclude his testimony or to grant the defendant’s post-trial motions after a jury verdict for the plaintiff. The Fourth Circuit affirmed, rejecting the defendant’s contention that the expert’s failure to preserve a worksheet underlying his opinions obliged the District Court to grant judgment as a matter of law.

The Fourth Circuit posited that ‛a judicial response to a spoliation of evidence should serve the twin purposes of leveling the evidentiary playing field and … sanctioning the improper conduct“ (quotation omitted). While it acknowledged that dismissal or judgment as a matter of law were sanctions available to the District Court to remedy the misconduct, it emphasized that ‛such a severe sanction should only be imposed when a lesser sanction will fail to serve the foregoing purposes“ and only ‛if the conduct was so egregious as to amount to a forfeiture of the claim, or if the effect of the conduct was so prejudicial that it substantially denied the defendant the ability to defend the claim“ (citations, quotations and brackets omitted).

Because the information contained on the destroyed notes was ‛had been entered into [the expert’s] computer and transformed into a chart used by [the expert] at trial,“ the Fourth Circuit indicated that this ‛situation is a far cry from those instances of spoliation of evidence that could establish bad faith,“ and it cited a Seventh Circuit decision (S.C. Johnson & Son, Inc. v. Louisville & Nashville R.R. Co., 695 F.2d 253, 259 (7th Cir. 1982)) for the proposition that even an adverse-inference instruction might be inappropriate.

The real question, of course, is whether the data in the computer and in the chart accurately reflected the data transcribed in the expert’s notes. The Fourth Circuit stressed the lack of prejudice because, among other things, the defendant could review its own records and ascertain what the information was — and, in fact, had presented it at trial through its own expert.

Practice Pointers. These rulings have important practical implications for practitioners. Prudent practitioners must operate defensively, and take steps like the following:

1. Each expert should, on retention, be made aware that everything he or she writes or receives, including every email, is potentially discoverable. Nothing should be discarded or purged (better yet, nothing written). This should be added to the expert retention letter, to show counsel’s diligence in this regard. Special efforts must be undertaken by those experts working for organizations whose electronic documents are regularly purged to insure that potentially discoverable material is not destroyed.

2. Lawyers should curtail their written communications with experts, and those of others, like consulting experts (whose engagement letter should similarly afford notice of the preservation obligation). There is no duty to create exhibits for one’s adversary.

3. Lawyers should be conscious of the risk that notes of conversations with experts may be discoverable. For years lawyers have urged clients not to take notes. Now, it is counsel’s turn.

4. Even if draft expert reports are discoverable, there is no obligation to create them. There is no prohibition against having an expert work on a single version of a single electronic document. This will not prevent the adversary from requesting the hard drive of the expert’s computer to see what can be electronically discerned. That, however, is expensive and less likely than a routine request for hard copies.

5. Lawyers should be slow to request any of this discovery. All sides generally have experts. It is effectively impossible to insure that no potentially responsive documents are lost, however hard one tries. Mutual assured destruction worked for decades. It still has legs.

6. The Advisory Committee on the Federal Rules of Civil Procedure is, in 2007, looking into this entire area. With any luck, it will revise Rule 26(a)(2)(B) and render drafts of expert reports, and lawyer/expert communications, undiscoverable.

IV. Spoliation as an Independent Tort

Because of the remedies available to litigants to deal with spoliation within lawsuits directed at other conduct, few states have elected to recognize an independent cause of action for spoliation as between the parties. Where the spoliation is effected by a third party, as to whom the litigants have no other remedy, however, there may be greater judicial willingness to accept the need for an independent tort, provided that the spoliator did not act innocently or lack any duty to preserve.

Intentional Spoliation. Courts in at least six states — Alaska, Kansas, New Jersey, New Mexico, Montana and Ohio — recognize an independent tort of intentional spoliation. See Hazen v. Municipality of Anchorage, 718 P.2d 456, 463 (Ak. 1986); Foster v. Lawrence Memorial Hosp., 809 F.Supp. 831, 836 (D. Kan. 1992); Oliver v. Stinson Lumber Co., 993 P.2d 11, 11 (Mont. 1999); Viviano v. CBS Inc., 597 A.2d 543, 550 (N.J. Super. Ct. App. Div. 1991); Coleman v. Eddy Potash, Inc., 905 P.2d 185, 185 (N.M. 1995); and Smith v. Howard Johnson Co., 615 N.E.2d 1037, 1037 (Ohio 1993).

Negligent Spoliation. Courts in at least five jurisdictions — Florida, Illinois, New Jersey, Kansas and the District of Columbia — recognize a tort of negligent spoliation, where the spoliator owes the plaintiff a duty to preserve the evidence that is destroyed. See Digiulio v. Prudential Prop & Cas. Ins. Co. 710 So. 2d 3, 5 (Fla. Ct. App. 1998); Boyd v. Travelers Ins. Co., 652 N.E.2d 267, 271 (Ill. 1995); Foster v. Lawrence Memorial Hosp., 809 F.Supp. 831, 836 (D. Kan. 1992); Holmes v. Amerex Rent-A-Car, 180 F.3d 294, 295 (D.C. Cir. 1999).

Third Party Spoliation. Finally, a number of jurisdictions recognize a tort for the negligent or intentional spoliation of evidence by third parties. See Smith v. Atkinson, 771 So.2d 429, 432 (Ala. 2000); Continental Ins. Co. v. Herman, 576 So. 2d 313, 315 (Fla. Dist. Ct. App. 1990); Thompson ex rel. Thompson v. Owensby, 704 N.E.2d 134, 136-40 (Ind. Ct. App. 1998); Oliver v. Stinson Lumber Co., 993 P.2d 11, 18 (Mont. 1999).

V. Electronic Discovery Sanctions Grid — Federal Remedies

The following two pages contain a grid reflecting the various sanctions powers available to the federal courts to sanction electronic discovery abuse. The powers identified are Federal Rule of Civil Procedure 26(g); Federal Rule of Civil Procedure 37; 28 U.S.C. § 1927; the inherent power of the court; and Federal Rule of Civil Procedure 11


* Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers; Chair, American Bar Association Section of Litigation (1997-98), and member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Editorial Board, Moore’s Federal Practice (3d ed.). Author, Sanctions: The Federal Law of Litigation Abuse (3d ed. Supp. 2007); Civil RICO: A Definitive Guide (2d ed. 2000); Modern Visual Evidence (Supp. 2007).
© 2007 Gregory P. Joseph

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