Online Exclusives: Seven Factors to Consider in Triggering a Litigation Hold and Creating a Safe Harbor After a Legal Hold Notice

Two decisions this year by highly regarded federal district judges detailing the problems and consequences of shoddy preservation and collection of electronically stored information (ESI) have put renewed focus on e-discovery policies and practices.

In the first decision, Judge Shira Scheindlin of the Southern District of New York, ruling in Pension Committee of the University of Montreal Pension Plan, et al., v. Banc of America Securities, found that the plaintiffs’ failure to implement a legal hold of ESI constituted gross negligence, even though no one alleged data was intentionally destroyed. In her January 2010 decision, the judge ordered further discovery, monetary sanctions and an adverse inference instruction to the jury.

Bill Belt, a LeClairRyan shareholder, notes that the Pension Committee opinion characterizes innocent mistakes, such as the failure to collect documents from tangential players, as “potentially negligent,” thus appearing to heighten the standard of care required in e-discovery cases.

The second decision, by Judge Lee Rosenthal of the Southern District of Texas in Rimkus Consulting Group v. Cammarata, et al., provides an interesting contrast to Pension Committee. Even though the defendants’ e-discovery violations in Rimkus were intentional, the court did not impose an adverse inference instruction. Rather, it decided in February 2010 to allow the jury to determine the facts and consequences of the defendants’ misconduct, if any, and to decide whether their actions constituted “bad faith.”

Together, the two cases underscore the importance of litigation hold practices.

“Judge Scheindlin noted in Pension Committee that preservation activities are generally scrutinized in hindsight, usually after something has gone wrong,” says Jennifer Young, a partner at Milberg. “Companies facing data preservation should assume something will go wrong, and consider how to prepare the best possible record to show that the company’s preservation efforts were nonetheless reasonable.”

Contrasting Cases

The 85-page Scheindlin opinion describes the data preservation efforts of 13 investors who sued to recover more than a half-billion dollars in losses from the liquidation of two British Virgin Islands-based hedge funds. While most e-discovery cases deal with spoliation by a defendant, this case involved ESI preservation and collection negligence by the plaintiffs.

Judge Scheindlin said litigants are still conducting electronic discovery in an “ignorant and indifferent fashion.” She was particularly disturbed by the plaintiffs’ description of their e-discovery effort, which she characterized as lacking in detail and so intentionally vague it was misleading.

Scheindlin found that seven of the plaintiffs acted negligently and six acted with gross negligence, resulting in the probable loss or destruction of relevant data, and she ordered that the jury receive adverse inference instructions–a serious consequence for the plaintiffs.

“You don’t like a monetary sanction or [an order] to restore a backup tape or redepose somebody on your nickel,” says David Lender, a partner at Weil, Gotshal & Manges and director of its e-discovery team. “But the orders you are most worried about are adverse inference instructions and preclusion of evidence. The jury can be instructed that you destroyed documents that you weren’t supposed to, and the jury can therefore presume that those documents were bad for your case.”

When that happens, Lender adds, the case is usually lost.

In the other case, several employees of Rimkus Consulting resigned to form a new company. Rimkus sued two of the former employees, alleging that they violated their noncompetes and stole trade secrets and proprietary information.

The court went into great detail concerning e-discovery shortfalls, noting that e-mails and attachments were intentionally deleted or missing from the documents the defendants produced for discovery. While the court referred to the defendants’ “unpersuasive” explanation for the failure to preserve ESI, it found that the defendants recovered a significant amount of incriminating evidence from other sources. This helped mitigate their negligent acts, allowing them to avoid an adverse inference instruction.

Judge Rosenthal also noted that the expected scope and cost of discovery varies depending on the nature and size of the case: “The reasonableness of discovery burdens in a $550 million case arising out of the liquidation of hedge funds, as in Pension Committee, will be different than the reasonableness of discovery burdens in a suit to enforce non-competition agreements and related issues, as in the present case,” he wrote.

Trigger Point

Experts agree that regardless of the size of the case, careful planning lessens the chances of an attorney being forced to argue the degree of negligence committed and the type of sanctions to be imposed. While the Federal Rules of Civil Procedure provide a safe harbor against sanctions for routine data destruction, in-house counsel are required to initiate a written litigation hold once a lawsuit is threatened.

“Use of a written litigation hold memorializes the date of the hold, who initiated the hold, a description of the information to be preserved, and the custodians who received the written litigation hold communication,” Young says. “Documentation of these details may be important if preservation efforts are ever challenged.”

Determining when inside counsel should trigger a hold is more difficult.

Lender suggests what he refers to as the Bible test: “What are people in the know going to say when they put their hand on the Bible and swear to tell the truth [in a deposition or at trial]? If they can honestly say that they did not believe that litigation was reasonably probable for stated reasons, a hold notice may not be necessary.”

The person receiving a threatening letter may be able to say, “I get these letters all the time, and 99 percent of the time they don’t lead to anything.” If not, Lender says, counsel should trigger a litigation hold.

He adds that Pension Committee clearly holds that parties aren’t required to keep backup tapes unless they are the only source of relevant data.

Compliance Concerns

Once a litigation hold is triggered, in-house attorneys should take proactive steps to ensure understanding and compliance by the people with access to and control of files, e-mails and other data.

Those custodians need to be interviewed about data on mobile devices as well as on company computers. As Judge Rosenthal noted in Rimkus, such action is critical to monitor potential “bad actors” who may inadvertently or overtly destroy evidence.

To ensure compliance with the hold, custodians should be encouraged to seek advice from the legal department. “It is important to include [an in-house attorney contact] in a hold notice,” Lender says. “What you don’t want are people getting a hold notice, reading it, not understanding it, not knowing who to direct questions to and then just blowing it off.”