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The principal purpose of this article is to warn practitioners about the hidden dangers of having cases assigned by superior court judges to appointed special masters. These masters are appointed frequently under California Code of Civil Procedure §639. The case study outlined below illustrates the danger and vagaries of these appointed private masters. To be sure, I have long been a proponent of alternative dispute resolution in all of its forms. I have not only been involved in innumerable mediations, arbitrations and sessions with special masters, but I also acted frequently as an arbitrator, mediator and special master. Even so, I have come to realize that the special procedures used to delegate decision-making responsibility to a private master can yield disastrous results. In the case outlined below, no amount of cajoling could convince the special master assigned to handle all discovery to take control of the case and stop the tactical flood of discovery motions. It is not uncommon for trial courts to impose limits on discovery. In one recent case, which resulted in a verdict of approximately $500 million, the trial judge limited the litigants to three discovery motions. And it is clear that certain discovery abuses warrant strong sanctions. However, in the current climate, with practitioners being inundated with articles in the media and judicial pronouncements regarding electronic discovery and the availability of sanctions for abuse — and with only modest legislative or judicial attention being paid to balancing the punishment and the “crime” — the underlying goal of conducting trials on the merits and obtaining justice within the legal system is being lost in a maze of tactical opportunism. Attention must be paid to the relative significance of the allegedly blameworthy conduct. If not, the tail will increasingly be found wagging the litigation dog. Discovery matters are frequently assigned to retired judges and/or experienced local trial attorneys and typically involve the payment of significant fees to these appointed special masters — often in excess of $400 per hour. The authority for the assignment of controversies to a special master is found in California Code of Civil Procedure §§ 638 and 639. Section 638 allows the parties to stipulate that a special master may be appointed to “hear and determine any or all of the issues in an action” and “to ascertain any fact.” More important, §639 authorizes the court to appoint a special master even if the parties do not consent. The burden and cost of electronic discovery may fall disproportionately on one of the parties in litigation, and this can lead to an unsatisfactory state of affairs in which litigation is determined not on the merits, but instead on rulings that arise out of discovery disputes. Unfortunately, any party with the financial ability to play the e-discovery card may be able to overwhelm its opponent with the discovery process to the point of either driving that opponent out of business or forcing it to forgo a valid claim for damages. Alternatively, it could leave a party without the financial ability to defend a case on the merits. The assignment of discovery matters to special masters necessarily must be a central focus of any effort aimed at managing potential abuse and ensuring fairness. Section 639 was amended in 2004 to allow counsel to limit the number of hours that a master may charge for his or her services. This amendment did not apply at the time of the case described in this article. Canon 6 of the Code of Judicial Ethics requires that an appointed referee shall comply with requirements aimed at “promoting public confidence” in the judicial system. E-discovery, however, mainly promotes public fear. If a party is guilty of deleting or destroying files, whether innocently or not, the jury or other trier of fact is entitled to know this and consider its effect on the merits of the case. As it now stands, the thermonuclear weapon of the terminating sanction is an independent weapon of disposition, unrelated to the merits — and certainly without the evidentiary controls of a motion for summary judgment. The case at hand, which grew out of events that began 10 years ago, is an example of a judicial system run amok. It all started in August 1998 when five employees resigned from their jobs at Synopsys, a company that designs computer chips and whose principal product was designed to search a customer’s computer chips to determine the adequacy of electric conductivity. The former employees immediately formed a new corporation, Nassda, that would now compete with Synopsys. Within six months, this competing company had developed an operational beta program. Interestingly, Synopsys waited for a year before contesting the competing product development and its introduction into the marketplace even though Synopsys’ CEO, in exit interviews with the five departing employees, had advised them not to compete. It was not until February 2000 that Synopsys filed a lawsuit in Santa Clara County Superior Court seeking damages for theft of trade secrets and unfair competition. Document production began in August 2001. A special master was then appointed — at $500 per hour — after the law and motion department judge apparently became concerned that there would be more discovery matters than he was willing or prepared to handle. Over the next 18 months, the case became embroiled in issues relating to electronic discovery. Synopsys claimed, among other things, that the five individual defendants had deleted data from personal and office computers. The defendants contended that they had been trying to develop a new product in a fast-moving, dynamic business atmosphere and that they were not concerned about preserving what they viewed as old or useless files in order to defend a lawsuit. The motions heard before the special master continued to accumulate. Ultimately, about 260 discovery motions were heard, including 14 nonterminating motions seeking money and evidentiary sanctions and 10 terminating sanction motions. By December 2002, it was apparent that the issue of whether trade secrets had been misappropriated would not determine the outcome of the case. Under the 21st century’s new litigation dynamic, a party can prevail in a case not by winning on the merits but by law and motion findings of discovery abuse judged according to judicially created document preservation rules designed by courts for lawyers rather than for business people. Right and wrong under common law and statutory principles now were potentially subordinate to a finding that a party deleted e-mails. During the discovery requested by the defendants and their counsel, various e-mails and documents were provided by Synopsys. E-mails written by engineers who worked there recited their fears that the product being developed by the former employees was going to be extremely successful. Interestingly, not one of the e-mails claimed that the individual defendants had done anything wrong. This evidence helped to make it clear that Synopsys was fully aware of the activities of the defendants and had taken no action to stop them. Indeed, by the time the lawsuit was filed, the defendants had captured a major market share from Synopsys. Discovery motions, meanwhile, continued to be filed. Huge amounts of attorneys’ fees were being spent month after month as part of this exercise. No controls or limitations were placed on the discovery process. Despite warnings from counsel that he should get control of this case, the special master continued to allow and hear motions to compel and to impose sanctions. As many as six lawyers would attend the hearings, which would continue day after day, week after week, month after month. A pattern was developing. Defendants came to fear that yet another motion for terminating sanctions would be forthcoming if something was not done to try and remedy what the special master seemed to believe were the inadequacies of previously supplied answers to interrogatories. At one point, about $1 million was spent on preparing a fifth set of supplemental answers, with the knowledge that yet another a motion would almost certainly be forthcoming. Ultimately no further motion was filed — at least as to those specific answers. However, by then another motion was pending, this one seeking terminating sanctions based on accusations about the handling of electronic information related to one defendant’s independent development of his own product — conduct that was described by the special master as “extracurricular.” At that point, a perfect storm — the confluence of a businessman’s naive handling of electronic data with the torrent of judicial exposition on the sanction to be imposed on one found not to have conformed to its new requirements for record-keeping — was about to descend upon this defendant. The special master granted the motion for the ultimate sanction and issued a 50-page order striking the defendant’s answer. This order was followed immediately by a plaintiff’s motion for entry of a default against the defendant for millions of dollars. The trial court then granted a stay pending disposition of the balance of the case. The special master’s order was issued and the default entered without any evidentiary finding that the defendant had violated his employment agreement with Synopsys or had misappropriated any trade secrets. The dispositive issue was not one of right and wrong or guilt or innocence but whether or not a defendant had deleted electronic information that may or may not have even related to the merits of the case. Postscript: Ultimately the dispute between Synopsys and this group of former employees settled, but not before more than 20 additional discovery motions were filed and heard. The defendant corporation no longer exists, following its acquisition by Synopsys in May 2005. The product that Nassda developed is now owned by Synopsys. The case generated some $100 million worth of attorneys fees. Nine law firms were involved in the prosecution and defense of the case. The special master received about $1 million. Pursuant to the terms of the settlement agreement, our client (one of the Nassda employees) paid nothing. Electronic discovery can and will continue to result in underlying legal issues being so obfuscated by the rhetoric relating to such discovery that justice in many cases may well never be served. The judicial temperament toward this developing area must be moderated. The tactics of well-financed parties who seek to take advantage of the current enthusiasm over deleted e-mail files and the availability of sanctions in the area of electronic information must be discouraged. There must be remedies for a party’s refusal to comply reasonably with discovery. But special masters also must recognize the need to balance the effect of the chosen sanction with the effect of the lack of compliance on the merits, particularly with the prevalence of massive electronic discovery issues in even the most run-of-the-mill cases. William J. McLean is a senior member of Thoits, Love, Hershberger & McLean in Palo Alto. He has more than 40 years of litigation experience, stretching back to his days as a deputy district attorney in Alameda County. McLean served as one of two lead defense counsel in the case described in this article.

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