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Sanctions

eDiscovery Trends: SEC Orders Its Staff to Cease Document Destruction Pending Policy Review
The U.S. Securities and Exchange Commission (“SEC”) recently ordered all of its enforcement staff attorneys to cease the destruction of documents from investigative files after criticism that the SEC wrongfully destroyed thousands of documents associated with high profile enforcement matters, including investigations into Wall Street banks.  The National Archives and Records Administration (NARA) and the SEC’s inspector general are currently examining whether the organization’s document destruction policy requires revision. This cease order comes in the wake of information provided by a SEC whistleblower, indicating that the SEC wrongfully destroyed thousands of documents from preliminary investigations referred to as “MUIs” (Matters Under Inquiry).
  • In the past, the SEC would destroy documents pertaining to “MUIs” that had been closed, including cases that never developed into formal investigations as well as those that had been decided.
  • Some of these destroyed documents pertained, either directly or peripherally, to what would later become high profile cases. Among them were documents relevant to the Madoff Ponzi scheme and several Wall Street bank fraud investigations.
  • Although private companies routinely destroy documents and files that are closed or no longer in use, the SEC is subject to federal laws and regulations that require federal agencies to retain more records than a private firm. The SEC has been criticized by members of Congress of violating these laws and avoiding its legal compliance burden, especially where destroyed documents could have proven crucial in later legal cases.
  • As a result, the present controversy has forced the SEC to work with NARA to reconsider its document retention policies and to suspend, for now, destruction of files and documents. Parties are still arguing whether a requirement to retain all documentation distracts resources from the SEC’s main objective of preventing, discovering and penalizing those involved in securities fraud.

So, what do you think? Has the SEC failed in a serious way to meet compliance standards, or is this controversy placing undue emphasis on documents that are unlikely to ever be needed? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Horrors! Does This Scare You?
Today is Halloween.  While we could try to “scare” you with the traditional “frights”, we’re an eDiscovery blog, so it seems appropriate to try to “scare” you in a different way.  Does this scare you?

Although the court declined to re-open the case, it found that defendant had committed discovery abuses, including failing to disclose relevant evidence and failing to issue a litigation hold; therefore, the court ordered the defendant to pay plaintiff an additional $250,000 over the previously agreed settlement amount.  The court further ordered that defendant had thirty days to furnish a copy of the court’s Memorandum Opinion and Order “to every Plaintiff in every lawsuit it has had proceeding against it, or is currently proceeding against it, for the past two years” and issued an additional $500,000 sanction to be “extinguished” upon a showing of compliance.

What about this?

Even though many (but not all) of the documents were recovered (most from backup tape), the court rejected the defendant’s argument that “there can be no spoliation finding because many documents were recovered” and eventually produced, stating: “The fact that technology permits the undoing of spoliation does not change at all the fact that spoliation has occurred.”

Or this?

Then, in January of this year, Judge Grimm entered an order awarding a total of $1,049,850.04 in “attorney’s fees and costs associated with all discovery that would not have been un[der]taken but for Defendants’ spoliation, as well as the briefings and hearings regarding Plaintiff’s Motion for Sanctions.”

How about this?

The court concluded based on case history that “emails and text messages are documents and subject to the same requirements for authenticity as non-electronic documents generally” and found that the evidence that the defendant had authored these text messages was absent.

Scary, huh?  If the possibility of sanctions and changing court requirements keep you awake at night, then the folks at eDiscovery Daily will do our best to provide useful information and best practices to enable you to relax and sleep soundly, even on Halloween!

Of course, if you really want to get into the spirit of Halloween, click here.  This will really terrify you!

What do you think?  Is there a particular eDiscovery issue that scares you?  Please share your comments and let us know if you’d like more information on a particular topic.

Happy Halloween!

eDiscovery Case Law: Defendant Sanctioned for Abandonment and Sale of Server; Defendants' Counsel Unaware of Spoliation

An Illinois District Court ordered heavy sanctions against the defense for spoliation “willfully and in bad faith” of documents stored on a server, in a case revolving around damages sought for breach of loan agreements.

In United Cent. Bank v. Kanan Fashions, Inc., No. 10 C 331, 2011 WL 4396856 (N.D. Ill. Sept. 21, 2011), the defendants were found to have hidden and sold (or fabricated the sale of) a server which was subject to discovery. The defendants also misled their own counsel about their discovery procedures with regard to its preservation obligations and the sale of this crucial server. Accordingly, a magistrate judge ruled in favor of sanctions against the defendants based almost entirely on recommendations made in United Cent. Bank v. Kanan Fashions, Inc., No. 10 CV 331, 2011 WL 4396912 (N.D. Ill. Mar. 31, 2011):

  • Although the defendants’ counsel reminded them several times of their obligation to preserve evidence, and the defendants claimed at all times that they were taking the necessary steps to ensure a smooth and correct discovery process, they misled their own attorneys. In fact, the defendants proceeded to sell a server that contained information relevant to the suit.
  • The circumstances associated with the sale were extensive, involving the defendants defaulting on a loan on the warehouse in which the server was stored. When they made plans for foreclosure on the warehouse, they also made arrangements that the bank would purchase the lease on the server, originally held by a different lender, without informing their defense lawyers.
  • When defense counsel learned of the foreclosure and these arrangements, the defendants maintained that they could get access to the server as needed for discovery.
  • Several months later, the court ordered the defendants to retrieve either the server or a forensic copy of its contents for discovery. It was only a few days later that the defendants informed their counsel and the court that the server had been sold by the bank to a business in Dubai.
  • All of the above took place after the defendants had been repeatedly informed of the need to preserve evidence for discovery, and of their obligations with regard to ESI.
  • The circumstances of the sale of the server were so unusual that the court concluded that the defendants had, themselves, had a hand in the sale of the server to Dubai and the removal of the server from the court’s reach.
  • The magistrate judge found that defendants were solely responsible for the spoliation, having deliberately misled the court, the plaintiffs, and the defendant’s own counsel.
  • Defendants were ordered to pay sanctions that include reimbursement of the plaintiff for all costs related to the Motion for Sanctions. Defendants are also “barred from introducing any evidence regarding the data on the warehouse server”. The jury is to be “informed of the Defendants’ abandoning of the server” and instructed that the spoliation of the server “may be considered evidence that the server contained evidence unfavorable to Defendants’ position.”
  • The plaintiff’s request for sanctions against the defense counsel was dismissed by the magistrate judge.

So, what do you think? Have you ever been involved in a case where a similar instance of spoliation took place? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Case Law: Defendant Ordered to Re-Post Infringing Photograph to Facebook Profile

A New Jersey court ordered the defendant to re-post a photograph displaying infringing trade dress to his Facebook profile for a brief period of time to allow the plaintiff to print copies, in a case involving trademark infringement.

In Katiroll Co., Inc. v. Kati Roll & Platters, Inc., No. 10-3620 (GEB), 2011 WL 3583408 (D.N.J. Aug. 3, 2011), the plaintiff argued for sanctions after the defendant pulled down infringing materials from his Facebook page and altered his Facebook profile photo, removing a profile picture that included the distinctive trade dress at issue in this case. The court ultimately decided against sanctions, but did order the defendant to re-post the photo in question, as follows.

  • The court first set out to establish whether or not the defendant’s actions could be considered as spoliation, citing the standard of review for the four criteria in spoliation. The four criteria include the party’s control over the evidence, apparent suppression or withholding of evidence, relevance of the destroyed evidence, and that it be “reasonably foreseeable” that the evidence would be required for discovery at a current or later date.
  • The altered profile photograph was deemed by the court to be relevant, and under the control of the defendant. However, whether that evidence was suppressed or withheld, and whether it was foreseeable that it would be required as part of discovery, remained at issue.
  • The plaintiff argued that the defendant should be sanctioned for failing “to preserve his Facebook pages in their original state” and “wanted PDFs of these pages prior to their being taken down”, but the court maintained that because these infringing pages had been removed at the plaintiff’s earlier request, it “would be unjust” to sanction the defendant for those actions.
  • The court also noted that Facebook profile photos are changed as often as weekly by those who use the site regularly, and that the defendant could not have known that changing his photo would have been an issue. “It would not have been immediately clear that changing his profile picture would undermine discoverable evidence,” the court maintained.
  • As result, the court declined to order sanctions against the defendant. Instead, the defendant was ordered to re-post the Facebook profile photo in question “for a brief time,” including the trade dress at issue (as they “ha[d] not been destroyed” and were “attached in several PDFs” to the court), so that the plaintiff might print whatever photos and Facebook pages it wishes. Afterward, the defendant was told to replace the photo again with a non-infringing image.

So, what do you think? Was the court’s decision fair, or should the defendant have been sanctioned for spoliation? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Case Law: Sanctions for Spoliation, Even When Much of the Data Was Restored

A Virginia court recently ordered sanctions against the defendant in a case of deliberate spoliation of electronic discovery documents.

In E.I. Du Pont De Nemours & Co. v. Kolon Indus., Inc., No. 3:09cv58, 2011 WL 2966862 (E.D. Va. July 21, 2011), the defendant was found to have committed spoliation “in bad faith” in a manner that constituted a “violation of duty… to the Court and the judicial process,” as follows:

  • The defendant, Kolon Industries Inc., was charged with misappropriation of trade secrets, conspiracy, information theft, and other allegations.
  • Within two days of receiving the plaintiff’s February 4, 2009 complaint, the defendant issued a litigation hold to upper-level employees. Several days after that, on February 10, a second hold notice was sent to all employees in English – even though most of Kolon’s staff members did not speak English.
  • Subsequently, many of the defendant’s key employees were found to have deleted files and emails that may have been relevant for discovery. After extensive investigation, the plaintiff’s expert discovered that the defendant had demonstrably deleted at least “17,811 files and email items” that should have been preserved for discovery.
  • The court determined that employees had deleted ESI “in bad faith,” conducting intentional spoliation and alteration of relevant evidence in direct contravention of the demands of discovery.
  • Even though many (but not all) of the documents were recovered (most from backup tape), the court rejected the defendant’s argument that “there can be no spoliation finding because many documents were recovered” and eventually produced, stating: “The fact that technology permits the undoing of spoliation does not change at all the fact that spoliation has occurred.”
  • Accordingly, the court leveled sanctions against the defendant, ordering it to pay the plaintiff’s legal fees, costs and expenses on this motion, and ordered an adverse inference instruction to the jury.  However, the court found that default judgment requested by the plaintiff was not appropriate, citing defendant’s attempts to place two litigation holds and the “good fortune that many deleted items were recoverable because of the preservation of Kolon’s backup tapes.”

So, what do you think? Were the sanctions appropriate, or should recovery of much of the deleted data have spared the defendant in this case? Have you ever been involved in a case where deleted electronic documents were recovered and sanctions avoided? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Case Law: "Untimely" Motion for Sanctions for Spoliation Denied

A recent ruling by the US District Court of Tennessee has denied a motion for sanctions for spoliation on the grounds that the motion was “untimely.”

In Am. Nat’l Prop. & Cas. Co. v. Campbell Ins., Inc., No. 3:08-cv-00604, 2011 WL 3021399 (M.D. Tenn. July 22, 2011), the plaintiff argued that the defendants’ admitted failure to preserve evidence “warrants a harsh penalty,” but the court found in favor of the defense that the motion was untimely.

  • The defendants, Tommy Campbell, Marshall C. Campbell and Campbell Insurance, Inc. were previously found to have failed to preserve email evidence from the period between April and July 2009. The plaintiff claimed that these emails contained “damning evidence” and that this discovery spoliation was deliberate.
  • This spoliation was discovered in May 2010, but the plaintiff did not file a motion for sanctions until July 16, 2011 – more than fourteen months after the spoliation was discovered and almost five months after discovery closed in February of 2011.
  • With the trial less than seven weeks way, the court considered this motion for sanctions for spoliation in the light of the summary of the law on spoliation that was provided in Goodman v. Praxair Services, Inc., 632 F.Supp.2d 494 (D.Md.2009). Among other points, the district court in Goodman v. Praxair encouraged courts to be aware of the time between the close of discovery and a motion related to spoliation, as well as cautioning against spoliation motions “made on the eve of trial.”
  • The court rejected the plaintiff’s excuse for the timing on the basis that “because the relevant emails were deleted and cannot possibly be produced, the Motion for Sanctions ‘is not a discovery motion.'”
  • Because of the “disruptive” timing of the motion, and the inability of the plaintiff to effectively explain why they delayed so long in filing a motion after this spoliation was encountered in discovery, the court ultimately ruled against the motion for sanctions, calling it “untimely”.

So, what do you think? Does spoliation of evidence “expire” or should timeliness matter at all in a case like this one? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Law: Possible Changes to the Federal Rules of Civil Procedure Affecting eDiscovery
As reported on Law Technology News recently, a subcommittee of the Judicial Conference of the United States is preparing to make recommendations about the possibility of changes to the Federal Rules of Civil Procedure that would improve eDiscovery procedures and rules in the United States, and affect how eDiscovery is conducted abroad.

eDiscovery Challenges up for Discussion

The subcommittee’s upcoming meeting in Dallas, scheduled for September 9, 2011, is intended to cover the discussion points documented by the Advisory Committee on Civil Rules in April 2011.

Those discussion points for September currently include:

  • The scope of challenges presented by electronically stored information (“ESI”),
  • Limitations of current U.S. and overseas rules that affect discovery, and
  • The impact of ongoing technological advancements.

Although technology continues to progress, creating new situations and questions relevant to eDiscovery, the rules that govern discovery of electronic information and documents have not been changed since 2006. David Campbell, the committee chairman and District Court Judge for Arizona, says that although improvements to these rules are important, change won’t happen overnight. Any official changes are not likely to come into effect until 2013 or 2014.

At this point, Campbell says, the September 9 meeting is intended as an opportunity “to learn from these folks… a due diligence effort on the part of our subcommittee.”

Three Types of Rules Affecting eDiscovery

The subcommittee plans to discuss three types of rules:

  • Specific rules for electronically stored information,
  • More general rules related to eDiscovery, and
  • Rules that specifically cover sanctions.

If enough progress is made, the results of the September 9 conference will be presented as a summary and proposal in November. In turn, this proposal would likely be up for discussion in March of 2012, when the subcommittee’s ideas will be open to public discussion. The end goal is for any changes to rules to be approved by December of 2012, although it could take as long as 2014 for any new rules to come into effect.

So, what do you think? Do you expect major changes to the rules regarding eDiscovery, and if so, what would you like to see changed, and why? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Case Law: Court Upholds Sanctions for Intentional Spoliation of Unallocated Space Data

The Supreme Court of Delaware recently upheld the sanctions against the defendant for wiping the unallocated space on his company’s computer system, despite a court order prohibiting such destruction.

In Genger v. TR Investors, LLC, No. 592,2010, 2011 WL 2802832 (Del. July 18, 2011), Arie Genger, CEO of Trans-Resources, Inc., argued that sanctions against him were unreasonable and made a motion for the court to overturn its previous decision regarding spoliation of discovery materials. Instead, after due process, the court upheld its earlier decision, as follows:

  • In TR Investors, LLC v. Genger, 2009 WL 4696062 (Del. Ch. Dec. 9, 2009), the defendant was found to have intentionally spoliated electronic discovery documents by instructing an IT consultant to wipe unallocated space on his company’s computers. This action was taken in contempt of court and in contravention of a Status Quo order directing all parties to prevent alteration or destruction of any company documents.
  • Genger was penalized with an order to produce 10 documents for discovery that had previously been considered privileged, the raising of the burden of persuasion with regard to his defense, a preclusion from his testimony being permitted as factual evidence, and several sanctions.
  • The sanctions included attorney’s fees and expenses related to the sanctions motions, which totaled roughly $3.2 million. At the time, this amount was agreed upon by all parties.
  • Following this 2009 order, the defendant appealed the sanctions, arguing that because the court’s Status Quo order did not explicitly refer to unallocated hard drive space, the obligation to preserve documents and discoverable materials found there became “an impossible burden… effectively requiring the company to refrain from using its computers entirely.”
  • On July 18, the court decided in favor of upholding the sanctions against Genger. The reasoning behind this decision revolved around the fact that Genger did not unknowingly delete discoverable documents in the normal course of using his company’s computers, but instead, deliberately set out to destroy information that was included in the court’s Status Quo order.
  • The court was clear in emphasizing that this decision is meant to apply only in such a situation, “where a party is found intentionally to have taken affirmative steps to destroy or conceal information to prevent its discovery at a time that party is under an affirmative obligation to preserve that information.”
  • The court also recommended that, in the future, parties be clear in discussing unallocated space on computer hard drives and in deciding to either include or exclude such space from preservation orders like this one.

So, what do you think? Have you been involved in any cases resulting in sanctions associated with deletion of unallocated space data? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Case Law: Court Orders Sanctions in Response to "Callous and Careless Attitude" of Defendant in Discovery

A Special Master determined that multiple discovery failures on the part of the defendant in an indemnity action were due to discovery procedures “wholly devoid of competence, yet only once motivated by guile”. Accordingly, the court ordered sanctions against the defendant and also ordered the defendant to pay all costs associated with its discovery failures, including plaintiff’s attorney fees and costs.

The defendant’s discovery efforts in PIC Group, Inc. v. LandCoast Insulation, Inc., No. 1:09-CV-662-KS-MTP, 2011 WL 2669144 (S.D. Miss. July 7, 2011) resulted in several discovery failures, including spoliation of data, mostly through carelessness and incompetence:

  • After consideration of the computer forensics experts recommended by the parties in this case, the court rejected all seven recommendations and appointed its own Special Master (Craig Ball, a previous thought leader interviewee on eDiscovery Daily) to conduct an investigation into the indemnity case, which would revolve around the collapse of scaffolding erected by the defendant.
  • The defendant’s efforts resulted in multiple discovery failures, including: 1) failure to impose “any corporate policy, procedure, or concerted effort [to] preserve electronic data”; 2) no effort to preserve or collect ESI until it was too late to protect the relevant data; 3) the theft of an employee’s laptop and subsequent loss of the backup of that hard drive; and 4) the erasure of another computer containing relevant ESI sometime two or three months after the collapse of the scaffolding at issue in this lawsuit.
  • As a result, the Special Master recommended sanctions against the defendant for its “callous and careless attitude” and sloppy measures taken in the course of discovery.
  • In response to these proposed sanctions, the defendant argued that none of its failures in the course of discovery were due to bad faith, and demonstrated that the plaintiff suffered only minimal prejudice.
  • Although the Special Master determined that the discovery failures were caused by a lack of caution while collecting and preserving evidence, rather than willful intent to alter discovery, he still recommended, and the court ordered, sanctions against the defendant.
  • Accordingly, the defendant was ordered to pay the plaintiff’s attorney fees and expenses accrued as a result of the defendant’s discovery failures, as well as pay the Special Master’s fees and expenses.  The defendant was also compelled to produce an image of the laptop that had been erased (from imaging conducted after the erasure) and the court reopened discovery in this case.  The court declined the Special Master’s recommendation for additional monetary sanctions ($50,000), though it did adopt his recommendation that the defendant “shall not seek indemnification or reimbursement from their insurance company” to pay the assessed fees.

So, what do you think? Were these sanctions merited, or should there be clear intent to deceive for such sanctions to be awarded? Please share any comments you might have or if you’d like to know more about a particular topic.

eDiscovery Breaking News: News International to Suspend Deletion of Emails and Other Documents
According to The Independent, staff at Rupert Murdoch’s newspapers has been warned to stop deleting any documents that may be relevant to the current investigations, as a suspension of its usual policy about deletion of documents goes into effect.

Over the course of the 2011 investigation into illegal voicemail hacking by News International employees, there has been contention over the ongoing deletion of documents at the newspaper and its subsidiaries. But only during this past weekend did News International’s parent company, News Corp, finally send an email to all of its employees instructing them to take measures preventing the deletion of documents that might be related to the investigation, including emails and other ESI.  Specifically, the email instructed employees to “Please suspend any automatic deletion or discarding of any documents, whether electronic or paper, including emails or drafts of documents… If you are uncertain whether a document is relevant… you should preserve it.”

Of course, the News Corp scandal has been not only significant eDiscovery news, but major world news as well.

  • Since January 2011, police have been investigating a list of roughly 4,000 potential targets whose voicemails may have been hacked as part of this scandal – including Hollywood celebrities, sports figures, politicians, and even members of the British Royal Family, most of whom were unaware of how easily their cell phone functions were hacked.
  • The newsroom at News of the World, the newspaper implicated in the systematic phone hacking, has been closed.
  • Sean Hoare, the whistle-blower who disclosed phone hacking at News of the World, was found dead in his home in Watford, Hertfordshire.  No cause of death has yet been identified.
  • During testimony to Parliament last week, Rupert Murdoch was attacked – by a pie wielding comedian, who was thwarted by Murdoch’s wife Wendi.

Although this email sends a positive message about News Corp’s willingness to protect eDiscovery information from this point forward, the instruction arguably comes too late to protect the documents and other ESI that have potentially been destroyed in the months since the investigation into the paper’s illegal phone hacking began as well as the years when News Corp faced numerous hacking claims during key periods associated with the those claims.  News International has acknowledged that some messages may be recoverable on backup disks, and the police are trying to recover that information now, said Tom Watson, a Labor Party member of Parliament.

From an eDiscovery perspective, this story may become “Enron-esque” before it’s all over.

So, what do you think? Is this instruction from News International a step toward greater openness and responsibility in this investigation, or is it simply a case of too little, too late? Please share any comments you might have or if you’d like to know more about a particular topic.