Spoliation & Electronic Discovery: A New Wrinkle In an Old Concept
A New Wrinkle in and Old Concept
Sharon Small & Jerald Harper
The evidentiary concept of spoliation—which permits a fact finder to infer that evidence which has been suppressed, altered, or destroyed was unfavorable to the responsible party—is not new. But recent developments in electronic discovery have given the concept a new wrinkle. The obligation of federal court litigants to preserve and timely produce e-mails in discovery has been drawn into much sharper focus as a result of two recent cases—Zubulake v. UBS Warburg, L.L.C., et al, 2004 WL 1620866 (S.D.N.Y.) (July 20, 2004) and Coleman Holdings v. Morgan Stanley & Co., 2005 WL 679071 (Fla. Cir. Ct.) (March 1, 2005). In the weeks and months following Zubulake, this district-court opinion received wide publicity from the legal community, with the American Bar Association, the Metropolitan Corporate Counsel, and Law Technology News weighing in on this issue. Morgan Stanley, a more recent decision, will no doubt garner attention as well.
Zubulake
In Zubulake, a routine employment discrimination case, Judge Scheindlin imposed sanctions that included an adverse-inference jury instruction because certain of the employees “willfully” deleted e-mails after being notified of a “litigation hold.” From the outset of her opinion, Judge Scheindlin stressed the importance of effective communication between corporate clients and their attorneys. Citing the famous words from the movie Cool Hand Luke, “what we have here is a failure to communicate,” the court stressed that the failure of UBS and its counsel to communicate had prejudiced
Zubulake.
Zubulake had filed a charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”). Immediately after Zubulake filed the EEOC charge, UBS’s in-house counsel instructed employees not to delete or destroy potentially relevant material (both electronic files and hard copies) and to cull such material for counsel’s review. UBS’s outside counsel subsequently met with a number of key UBS employees and reiterated the instruction to preserve relevant materials—including emails. After Zubulake requested the production of emails stored on backup tapes, UBS’s outside counsel instructed the information technology staff to stop recycling backup tapes. In spite of these instructions, UBS employees deleted relevant emails. (Some of the emails were ultimately recovered from the backup tapes and belatedly produced, and some were never recovered.) Zubulake also presented evidence that UBS employees had had emails on their computers relevant to the lawsuit but never provided them to counsel and, therefore, they were not produced to Zubulake until her attorney learned of their existence during depositions. Upon discovery of this, Zubulake then moved for sanctions. With this background, the court was ready to rule.
The court explained the standard for imposing sanctions, stating that a party seeking sanctions for spoliation of evidence must establish (i) that the party with control over the evidence was obligated to preserve it at the time that it was destroyed; (ii) that the evidence was destroyed with a “culpable state of mind;” and (iii) that the evidence was relevant such that a reasonable trier-of-fact could find that it would have supported the moving party’s claim or defense.
Importantly, the court explained both that “culpable state of mind” includes negligence and that when evidence is destroyed in bad faith the relevance requirement is presumed to be satisfied. After finding that Zubulake had met the first prong, the court concluded that UBS and its counsel had not taken all necessary steps to guarantee that relevant evidence was preserved. While the court acknowledged that counsel could have been “more diligent” in the preservation process, the focus of the court’s ire was the “UBS employees [who] deleted emails in defiance of counsel’s explicit instructions not to.”
Accordingly, the court declared that:
the jury would receive an adverse inference charge with respect to emails that UBS deleted after August 2001;
UBS was required to pay for any additional depositions or re-depositions required by the late production of evidence;
and
UBS was required to pay the reasonable costs and attorneys’ fees of the motion.
While Zubulake was an employment discrimination dispute, the issues highlighted therein are not unique to such cases. With electronic communications becoming increasingly prevalent, one should expect the issues raised in Zubulake to draw enormous attention. Moreover, the case is also significant because the court imposed sanctions despite the apparently genuine attempts by counsel to comply with discovery obligations—both inside and outside counsel gave repeated instructions to employees not to destroy emails. Thus, Zubulake teaches that even well-meaning efforts by counsel to preserve and collect electronic discovery may not be adequate. And merely going through the motions is never enough.
Morgan Stanley
Most recently, the investment banking firm of Morgan Stanley was dealt a severe legal blow (to the tune of $604 million) after a circuit court judge granted the plaintiff’s motion for an adverse inference instruction to the jury. See Coleman Holdings, Inc. v. Morgan Stanley & Co., 2005 WL 679071 (Fla. Cir. Ct.)(March 1, 2005). Morgan Stanley was sued for fraud in connection with a stock sale transaction. Because Morgan Stanley’s knowledge of the fraudulent scheme was key, the plaintiff sought access to Morgan Stanley’s documents, including email. Morgan Stanley implemented a “litigation hold” with regard to paper documents, but its employees overwrote emails after 12 months, despite an SEC regulation requiring that they be preserved for two years. See 17 C.F.R. § 240.17a-4. Morgan Stanley also violated an Agreed Order by failing to search all backup tapes for relevant emails and providing a false certification of compliance with the court order.
The court had entered an Agreed Order requiring Morgan Stanley to: (i) search the oldest complete backup tape for employees involved in the transaction; (ii) review emails from a specified period and those containing certain search terms regardless of their date; (iii) produce all non-privileged responsive emails by May 14, 2004; (iv) provide a privilege log; and (v) certify complete compliance with the Agreed Order. What followed the entry of the Agreed Order was a series of blunders and mis-statements that set Morgan Stanley on a collision course with the court. While Morgan Stanley produced 1300 emails on time, it did not certify compliance until June 23, 2004—more than a month after the production. Sometime prior to the issuance of the certification, however, the manager in charge of the project learned of 1,423 additional backup tapes in Brooklyn, New York that had never been processed in accordance with the Agreed Order, making his certification false. Despite the realization that these tapes covered the relevant time period, the manager never withdrew the false certification or informed CPH. In addition, other tapes that were later found in Manhattan were also handled in violation of the Agreed Order.
Morgan Stanley then changed project managers. But the new manager made no immediate effort at email production. In fact, five months passed before she was even informed about the litigation. Moreover, the court was not informed until November 17, 2004 that the certificate of compliance was incorrect due to the discovery of new material. The next day, Morgan Stanley produced 8,000 pages of additional emails, stating that they had come from “newly discovered” tapes. But this assertion turned out to be false because the new manager, Ms. Gorman, testified that her team did not figure out how to upload and make searchable the materials until January 2005.
The court admonished Morgan Stanley and its counsel for a lack of candor which had “frustrated the court’s and opposing counsel’s ability to be fully and timely informed.” According to the court, Morgan Stanley’s failure to process material in the designated area and to search the material as required by the Agreed Order was a “willful and a gross abuse of its discovery obligations.” The court concluded that Morgan Stanley had acted “knowingly, deliberately, and in bad faith.” This, coupled with their failure to maintain email in readily accessible form as required by SEC regulations, warranted the imposition of sanctions. The sanctions were as follows: (i) a statement of facts that was read to the jury detailing Morgan Stanley’s behavior in whatever evidentiary phase requested by CPH; (ii) CPH may argue that Morgan Stanley’s concealment of its role in the Sunbeam transaction is evidence of its malice or evil intent, going to the issue of punitive damages; (iii) Morgan Stanley would bear the burden of proving to the jury that it lacked knowledge of the Sunbeam fraud; and (iv) Morgan Stanley would pay the attorneys’ fees and costs of the motion. Most significantly, the burden of proof was flipped from plaintiff to Morgan Stanley, and that essentially sounded the death knell for Morgan Stanley.
Lessons from Zubulake and Morgan Stanley
Cases like Zubulake and Morgan Stanley highlight the significance of email discovery, and in-house counsel need to be aware of the related pitfalls. Companies and their attorneys must carefully evaluate the use of electronic information and create effective programs to ensure that such information is properly preserved. There may be no single “right” way to comply with these obligations, but here are some suggestions for avoiding the pitfalls highlighted by Zubulake and Morgan Stanley:
Compliance Program. In-house counsel should make document preservation a part of its compliance program, continually stressing to employees the importance of the company’s preservation obligations and imposing sanctions on non-compliant employees.
Outside Counsel. Outside counsel must be directly involved in the implementation of the company’s preservation program and be prepared to correct the deficiencies or inadequacies therein.
Litigation Hold. At the first indication of a dispute, a “litigation hold” should be implemented. Backup tapes containing communications by “key actors” should be quickly identified and sequestered. Employees should be regularly reminded of the hold and sanctions should be imposed upon non-compliant employees.
Outside Vendors. Consider using third-party or outside vendors to assist in-house technical staff with the preservation effort.
Conclusion
Compliance with electronic preservation obligations continues to spark debate among rule-makers, and changes in discovery practices are occurring as a result. For instance, the American Bar Association has recently amended its standards on document retention and preservation issues, and the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States has invited comment on a proposal for revising the Federal Rules of Civil Procedure to specifically address the issues raised by electronic discovery. In addition, many courts have adopted or are considering local rules addressing this subject. With proper protocols in place for electronic preservation, corporate litigants may use the standards set forth in Zubulake as a shield rather than have those same standards used as a sword against them.
Sharon Small is an associate with the law firm of Ramey and Flock in Tyler, Texas. She concentrates her practice on general commercial litigation and business disputes. Matters litigated include business tort, intellectual property and unfair competition claims. Ms. Small also has experience representing companies in corporate governance matters and business transactions.
Jerald Harper is the principal of Harper Law Firm in Shreveport Louisiana. He has over 25 years experience in general commercial litigation, including intellectual property, unfair competition, and securities litigation. Mr.. Harper has appeared in State and federal courts all over Louisiana and as pro hac vice counsel in numerous other States, including Texas, Arkansas, Missouri, California, New York, Wisconsin, Illinois.
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