October Edition of Notable Cases and Events in E-Discovery

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1 OCTOBER 25, 2013 E-DISCOVERY UPDATE October Edition of Notable Cases and Events in E-Discovery This update addresses the following recent developments and court decisions involving e-discovery issues: 1. An opinion by U.S. District Judge Shira Scheindlin of the Southern District of New York ordering an adverse inference instruction against a plaintiff that had intentionally destroyed relevant s of key players and had failed to institute a litigation hold for more than 15 months after giving notice of a possible lawsuit; 2. A Northern District of California ruling warning a party that it might be required to use an e-discovery vendor and to submit sworn declarations after the Court found that the party s counsel was not sufficiently proactive in ensuring that document searches were complete in light of obvious gaps in production; and 3. A Southern District of California decision that the plaintiff was not entitled to spoliation sanctions because the spoliated evidence was irrelevant and the sanctions motion was untimely. 1. In Sekisui American Corp. v. Hart, 2013 WL (S.D.N.Y. Aug. 15, 2013), U.S. District Judge Shira A. Scheindlin ordered an adverse inference instruction against a plaintiff that had intentionally destroyed relevant s of key players and had failed to institute a litigation hold for more than 15 months after giving notice of a potential lawsuit to defendants. Plaintiff Sekisui America Corporation brought an action against Richard Hart and Marie Louise Trudel-Hart for breach of contract relating to Sekisui s acquisition of America Diagnostica, Inc. ( ADI ). During discovery, Sekisui disclosed that files belonging to ADI employees including Hart and FDA compliance officer Leigh Ayres had been deleted or were missing and that Sekisui had not instituted a litigation hold until more than 15 months after sending a Notice of Claim to the defendants. The defendants requested sanctions for spoliation of evidence in the form of (1) an adverse inference instruction based on the destruction of Hart s and Ayres ESI, and (2) sanctions for spoliation based on alleged or actual loss of the folders of other ADI employees. The matter was referred to a magistrate judge who found that plaintiff s conduct may have amounted to gross negligence and that the deleted ESI may have been relevant but declined to impose sanctions because the defendants had failed to show prejudice. Sekisui American Corp. v. Hart, 2013 WL (S.D.N.Y. June 10, 2013). Judge Scheindlin reversed the decision of the magistrate judge and imposed sanctions based on Sekisui s destruction of ESI. She stated that the Second Circuit decision in Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), established the standards governing adverse inference instructions. A party seeking an adverse inference instruction must establish: (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; and 1501 K Street, N.W., Washington, D.C ,

2 Page 2 to the party s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Sekisui, 2013 WL , at *4 (quoting Residential Funding, 306 F.3d at 107). Judge Scheindlin found that all three factors were met. On the duty to preserve, Sekisui conceded that it had an obligation to preserve the evidence that had been destroyed. Sekisui, 2013 WL , at *4 n.48. With respect to culpability, Judge Scheindlin stated that a culpable state of mind could be found based on a showing that evidence was destroyed knowingly, in the absence of intent or negligence Id. Such a rule existed as a necessary balance for restoring the evidentiary balance. The inference is adverse to the destroyer not because of any finding of moral culpability, but because the risk that the evidence would have been detrimental rather than favorable should fall on the party responsible for its loss. Id. (quoting Residential Funding, 306 F.3d at 108). The Court ruled that the destruction of Hart s and Ayres s evidence was willful and/or intentional and stated that the suggestion that the ESI was destroyed to save space on the server did not change the fact that it was done willfully. Sekisui, 2013 WL , at *6. Judge Scheindlin noted that that [i]n the context of an adverse inference instruction, there is no analytical distinction between destroying evidence in bad faith... and destroying it willfully. Id. The Court also found that the plaintiff s failure to implement appropriate document retention procedures in this case constituted gross negligence. Judge Scheindlin cited the following facts in support of this finding of gross negligence: that no litigation hold was issued until fifteen months after the Notice of Claim was sent to defendants, that Sekisui is the plaintiff and had full knowledge of the possibility of litigation, that Sekisui failed to notify its IT vendor of the litigation hold until six months after its issuance, and that at least two significant ADI employees s were destroyed at ADI s direction. Id. On the issue of relevance, Judge Scheindlin found that the Hart and Ayres s were relevant, as Hart s and Ayres positions at the company meant that their electronic communications addressed, among other things, the adequacy of ADI s facilities and the company s compliance with FDA regulations, two issues in the breach of contract case. Id. at *7. The remaining issue was whether the plaintiff had demonstrated prejudice. On this point, Judge Scheindlin overruled the magistrate judge, finding that prejudice is presumed if the s were willfully destroyed. The Court held that once willfulness is established, no burden is imposed on the innocent party to point to now-destroyed evidence which is no longer available because the other party destroyed it. Id. (emphasis in original). Judge Scheindlin pointed out that requiring an innocent party to prove prejudice would skew incentives: To shift the burden to the innocent party to describe or produce what has been lost as a result of the opposing party s willful or grossly negligent conduct is inappropriate because it incentivizes bad behavior on the part of would-be spoliators. That is, it would allow parties who have destroyed evidence to profit from that destruction. Id. (quoting Residential Funding, 306 F.3d at 109). The Court noted that prejudice is presumed only in determining whether to give an adverse inference instruction, as the jury may still determine that the defendants were not prejudiced and decline to draw any adverse inference. Sekisui, 2013 WL , at *7. Based on this record, the Court concluded that an adverse inference instruction was required and decided to give the following instructions, which stated in relevant part: Spoliation is the destruction of evidence or the failure to preserve property for another s use as evidence in pending or reasonably foreseeable litigation. To demonstrate that spoliation occurred, several elements must be proven by a preponderance of the evidence: First, that relevant evidence was destroyed after the duty to preserve arose.

3 Page 3 Second, that the evidence lost would have been favorable to the Harts. As to the first element I instruct you, as a matter of law, that Sekisui failed to preserve relevant evidence after its duty to preserve arose. This failure resulted from an employee s intentional directive given to ADI s information technology vendor to destroy the files of at least Richard Hart and Leigh Ayres. Moreover, this failure resulted from Sekisui s gross negligence in performing its discovery obligations. I direct you that I have already found as a matter of law that this lost evidence is relevant to the issues in this case. As to the second element, you may presume, if you so choose, that such lost evidence would have been favorable to the Harts. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs conduct in failing to preserve the evidence. Sekisui offered evidence that, although evidence was lost and it may have been relevant, nevertheless such evidence would not have been favorable to the Harts. If you decline to presume that the lost evidence would have been favorable to the Harts, then your consideration of the lost evidence is at an end, and you will not draw any inference arising from the lost evidence. However, if you decide to presume that the lost evidence would have been favorable to the Harts, you must next decide whether Sekisui rebutted that presumption. If you determine that Sekisui rebutted the presumption that the lost evidence was favorable to the Harts, you will not draw any inference arising from the lost evidence against Sekisui. If, on the other hand, you determine that Sekisui has not rebutted the presumption that the lost evidence was favorable to the Harts, you may draw an inference against Sekisui and in favor of the Harts namely that the lost evidence would have been favorable to the Harts. Id. at *8 (emphasis in original). The Court also found that the defendants were entitled to an award of reasonable costs and attorneys fees. 2. In Logtale, Ltd. v. IKOR, Inc., 2013 WL (N.D. Cal. July 31, 2013), Magistrate Judge Donna M. Ryu warned a party that it might be required to use an e-discovery vendor and to submit sworn declarations on document preservation and collection after the Magistrate Judge found that defense counsel was not sufficiently proactive in ensuring that document searches were complete in light of obvious gaps in production. Plaintiff Logtale, Inc., a shareholder in the pharmaceutical company IKOR, Inc., alleged that IKOR and two of its officers made misrepresentations to investors. Plaintiff served its first set of interrogatories, requests for production, and requests for admission on December 4, 2012 with a response deadline of January 7, IKOR did not serve responses until March 2013, and IKOR admitted that its responses were incomplete. The parties jointly filed a letter brief in which plaintiff moved for complete discovery. After IKOR s counsel failed to appear, the Court granted the motion to compel on April 22, 2013 and awarded plaintiff sanctions. IKOR served written discovery responses ordered by the Court and paid the sanctions, but plaintiff alleged that the responses remained incomplete. Id. at *4. Plaintiff filed a motion to enforce compliance with the Court s April 22 order, claiming that IKOR s production remained incomplete because defendants had failed to search adequately for all responsive electronic documents. At the time the motion was filed, all three defendants had produced a total of 121 s, 109 of which were communications with plaintiff. The lack of responsive documents, plaintiff alleged, raised concerns about the defendants retention and collection efforts. Defendants responded that its counsel had asked IKOR to complete a search for responsive documents, and when that search and a second requested search were incomplete, counsel had proposed a third search. Defendants claimed that counsel was then reviewing 10,000 documents returned by the third search. The Magistrate Judge ruled that defendants must produce all responsive documents no later than August 26, 2013 and that, if there were continuing problems, Magistrate Judge Ryu would order defendants to retain an e-discovery vendor

4 Page 4 and submit detailed sworn declarations regarding document preservation and collection. The Magistrate Judge admonished defense counsel that it had not been sufficiently proactive in ensuring that his clients are conducting thorough and appropriate document searches, especially in light of obvious gaps and underproduction. Id. at *2. The Magistrate Judge noted that the Federal Rules of Civil Procedure imposed an affirmative obligation to ensure a search for responsive documents is complete. Id. (citing Fed. R. Civ. P. 26(g) (emphasis in original)). Upon noticing gaps in the production, counsel was obligated to make a reasonable inquiry as to the thoroughness of that search. Logtale, 2013 WL , at *2. The Magistrate Judge also found that a defendant had waived his objections to various document requests because his responses were late. Acknowledging that the requests were vague and overbroad, however, the Magistrate Judge ordered the parties to refine the scope of production. Id. at *3. Further, the Magistrate Judge found that defense counsel s short narrative responses to interrogatories with references to various documents and pleadings were insufficient and ordered them to be supplemented. Id. The Magistrate Judge awarded $5,200 in attorneys fees due to defendants failure to timely and appropriately respond to the discovery requests. 3. In Cottle-Banks v. Cox Communications, Inc., 2013 WL (S.D. Cal. May 21, 2013), U.S. District Court Judge Gonzalo Curiel held that plaintiff was not entitled to spoliation sanctions because the spoliated evidence was irrelevant to the case and the sanctions motion was untimely. The case involved a claim that Cox Communications sent new cable customers a set-top box allowing those customers to access extra services without asking them to affirm that they wanted the device and without disclosing that Cox would charge extra for use of the device. Id. at *4. On September 13, 2010, plaintiff filed a putative class action against Cox for charging class members rental fees for equipment they never requested. Id. at *11. On June 14, 2011, plaintiff requested that Cox produce all recordings of telephone calls with customers and/or potential customers. Id. at *12. Cox s counsel responded that Cox had not preserved customer-call recordings but had instead followed the company s usual practice of taping over those recordings every 30 days. Id. Cox did, however, begin preserving call recordings after the June 2011 production request. Id. On September 2, 2011, plaintiff filed another motion to compel production of Cox s call recordings, and the Court instructed Cox to produce a random sample of 200 calls, with Cox thereafter producing 280 call recordings by early Id. Plaintiff filed yet another motion to compel, but then withdrew the motion. Id. On January 23, 2012, plaintiff filed a motion for spoliation sanctions, based on Cox s failure to preserve calls starting in September Id. Specifically, plaintiff requested two sanctions: (1) An adverse inference instruction that all of the lost call recordings would have evinced a common practice by [Cox of] not disclosing equipment and corresponding charges during telephone calls with customers ordering cable service ; or (2) An order precluding Cox from introducing evidence that pre-june 2011 recordings complied with the applicable law. Id. at *10. The district court first considered and denied plaintiff s motion for class certification, id. at *6-*10, and then addressed the request for an adverse inference instruction. As the Ninth Circuit has not yet adopted a test establishing standards for imposing such an instruction, the Court relied on the Second Circuit s test: a court may impose an adverse inference instruction for spoliation if (1) the custodian had an obligation to preserve the evidence at the time the evidence was destroyed; (2) the custodian destroyed the evidence with a culpable state of mind ; and (3) the destroyed evidence was relevant. Id. at *13 (citing Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (3d Cir. 2002). First, the Court addressed whether Cox had an obligation to preserve the recordings as of September A party has an obligation to preserve data if it reasonably anticipates litigation and the data is relevant, likely to lead to discoverable evidence, likely to be requested during discovery, or subject to a pending discovery request. Cottle-Banks,

5 Page WL , at *13. In this case, Cox argued that in September 2010 it was unaware that the recorded customer calls were relevant and worth preserving because regulators had yet to clarify that cable companies have a duty during such calls to obtain customers affirmative agreement to receive set-top boxes and incur an extra charge. Id. at *14. The Court rejected that argument, stating it was immaterial that in September 2010 the law was unclear and finding that Cox should have known that the telephone recordings would have reasonably been requested during discovery, as most customers ordered cable service over the phone. Id. Thus, the Court held that plaintiff had satisfied the first criterion for obtaining an adverse inference instruction. Second, the Court considered whether Cox had acted with a culpable state of mind, which includes bad faith or negligence. Id. On this issue, Judge Curiel concluded that Cox had been negligent, even if Cox had destroyed the tapes due to routine business policy, as Cox had an obligation to preserve the call recording [and] was negligent in failing to preserve the back up tapes. Id. at *15. The Court thus found that plaintiff had satisfied the second criterion for obtaining an adverse inference instruction. Finally, the Court addressed whether the lost tapes were relevant. Id. In a portion of the decision denying plaintiff s motion for class certification, Judge Curiel had reviewed the evidence relating to the 280 produced calls and had concluded that Cox had no uniform policy on disclosure of set-top box fees. Id. at *8. On the sanctions issue, he stated that the plaintiff had produced no evidence that Cox s pre-june 2011 practice for accepting orders over the phone was different from the practice Cox had used in the later calls that Cox had preserved for discovery. Id. The plaintiff claimed that the deleted calls would provide insight about Cox s ordering practices, but Cox offered evidence that its customer service representative training during these two periods did not change. The Court found that the pre-june 2011 recordings were unlikely to have contained relevant evidence, as the later, preserved recordings showed no consistent pattern of Cox customer service representatives failing to disclose the set-top box fees. Id. at *8, *15. The Court therefore held that the deleted recordings were irrelevant and on that basis denied the plaintiff s request for an adverse inference instruction. Judge Curiel also denied the request for a preclusion sanction. Id. at *16. He explained that the plaintiff had failed to show that the lost recordings contained relevant evidence, which meant that plaintiff had not suffered prejudice to warrant such a sanction. Id. As an alternative basis for his ruling, Judge Curiel held that plaintiff s sanction requests were untimely. The plaintiff had learned in a May 24, 2011 deposition that Cox was deleting the call recordings, but waited until February 2012 to request sanctions. Id. The Court found that the delay was too unreasonable to allow sanctions. If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work. The E-Discovery Task Force of Sidley Austin LLP The legal framework in litigation for addressing the explosion in electronic communications has been in flux for a number of years. Sidley Austin LLP has established an E-Discovery Task Force to stay abreast of and advise clients on this shifting legal landscape. An interdisciplinary group of more than 25 lawyers across all our domestic offices, the Task Force monitors and examines issues and developments in the law regarding electronic discovery. The Task Force works seamlessly with our firm s Litigators who regularly defend and prosecute all types of litigation matters in trial and appellate courts, federal and state agencies, arbitrations, and mediations throughout the country. The co-chairs of the E-Discovery Task Force are Alan C. Geolot ( , ageolot@sidley.com), Colleen M. Kenney ( , ckenney@sidley.com), and Jeffrey C. Sharer ( , jsharer@sidley.com). To receive future copies of this and other Sidley updates via , please sign up at BEIJING BOSTON BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. Sidley Austin refers to Sidley Austin LLP and affiliated partnerships as explained at