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The lasting legal legacy of the current era of electronic discovery likely will lie in the area of spoliation and sanctions. Mere negligence in preserving or promptly producing electronic information is sanctionable, and even hiring and heeding electronic data experts is no guarantee that sanctions will be avoided. That is the teaching of the 2nd U.S. Circuit Court of Appeal’s important decision in Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002). Residential Funding holds that negligent delay — not destruction, merely delay — in producing electronic data is sanctionable. Further, on the facts, the nonproducing party’s reliance on an outside expert firm, hired to retrieve the data that was sought, is not necessarily a defense against sanctions. A notable aspect of this decision lies in the evident need the court felt to set strict parameters to govern behavior in this area. It applied a negligence standard without even addressing a key Federal Rule of Civil Procedure that had been triggered and would have contemplated the imposition of sanctions for negligence. The court relied instead on a power that requires a showing of bad faith; yet, under the court’s holding, bad faith need not be shown. The plaintiff in Residential Funding won a $96.4 million jury verdict. The defendant’s sole ground for reversal on appeal was the trial court’s denial of a defense motion for sanctions, seeking an adverse-inference instruction, to redress the plaintiff’s failure to produce voluminous e-mail before the trial had begun. The plaintiff claimed, and the trial court evidently accepted, that the e-mail was produced belatedly because the plaintiff’s outside expert was unable to retrieve it from backup tapes that the plaintiff provided to the defense as the jury was empaneled. In the absence of bad faith or gross negligence, the trial court declined to sanction the plaintiff and rejected the adverse-inference instruction. The 2nd Circuit vacated the order denying sanctions and held that even negligently delayed production is sanctionable and subject to an adverse-inference instruction — even though there was no showing that the unproduced e-mail contained any damning evidence. (The trial court had invited the defendants to move for a new trial if any were discovered. Evidently, no motion was made.) The court’s legal analysis has broad implications. The court looked first to Fed. R. Civ. P. 37(b)(2), because the belated production of the electronic discovery at some point transgressed an order of the lower court. Rule 37(b)(2) provides that simple “fail(ure) to obey an order to provide or permit discovery” suffices to support a sanctions award. Consequently, there is nothing remarkable about the court’s holding that disobedience of a valid discovery order is sanctionable even if the offender claims that the failure to obey was negligent rather than intentional. The offender’s state of mind may affect the severity of the sanction that is apt, however. See generally, Joseph, Sanctions: The Federal Law of Litigation Abuse � 48-49 (3d ed. 2000). Further, the court stressed that Rule 37(b)(2) authorizes the trial judge to “make such orders in regard to the failure as are just,” and this has long been held to support an adverse-inference instruction. ABSENCE OF ORDER This analysis, however, addresses only the situation in which a court has ordered production. Is an adverse-inference instruction available for negligent nonproduction in the absence of a court order? The Residential Funding court held that it is, observing that, even in the absence of a court order, sanctions are awardable for dilatory discovery tactics under the inherent power of the court. Inherent-power sanctions, however, require a showing of bad faith. Chambers v. NASCO Inc., 501 U.S. 32 (1991). The 2nd Circuit did not discuss this prerequisite, and it would appear to be incompatible with a sanction based on negligence, in the absence of court order. An alternative source of sanctioning power in this circumstance, however — and one not requiring any showing of bad faith — is Rule 37(c)(1). As amended, effective Dec. 2000, (and fully applicable in Residential Funding), Rule 37(c)(1) provides that a failure to supplement discovery responses seasonably (as required by Rule 26(e)(2)) triggers a presumptive exclusion of the unproduced evidence (not helpful in Residential Funding) and authorizes the trial judge to “impose other appropriate sanctions … and may include informing the jury of the failure to make the disclosure.” This is essentially what the defendant in Residential Funding sought. Even though it does not appear from the opinion that anyone called this rule to the attention of the court, the rule supports the result reached. Under Residential Funding, an adverse-inference instruction is available for either spoliation or delayed production if: (1) a party had an obligation to preserve or produce the evidence; (2) that party failed to do so with a culpable state of mind; and (3) the destroyed or missing evidence was relevant to the claim or defense of the other party seeking discovery such that a reasonable trier of fact could find it would support the claim or defense (ultimately this is a jury issue). Residential Funding expanded the “culpable state of mind” in factor (2) to encompass negligence, reasoning that “each party should bear the risk of its own negligence.” As for factor (3), the court set the bar of relevance above that set by Fed. R. Evid. 401, requiring that the party seeking the adverse inference adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence “would have been of the nature alleged by the party affected by its destruction” or nonproduction. At the same time, the court stressed that courts should not hold the victim of nonproduction “to too strict a standard of proof because to do so would subvert the … purposes of the adverse inference,” allowing wrongdoers to profit from their misconduct. The court emphasized that, if bad faith or gross negligence is shown, that alone is usually sufficient evidence of relevance to go to the jury with an adverse-inference instruction. It also stressed that bad faith or gross negligence (as well as simple negligence) may be shown by proof that a party failed to hire an expert to assist with electronic production as soon as the party realized that it could not retrieve potentially responsive data on its own. The court added that continued reliance on an expert who is not producing results may also give rise to an inference of a culpable state of mind. As trial approaches and the need for prompt production escalates, the court held, “purposefully sluggish” acts may be sufficient to warrant the imposition of sanctions, including an adverse-inference instruction. RIGHT FROM THE START The Residential Funding decision has several practical repercussions. First, to avoid any prospect of sanctions, it is essential to address the issue of electronic-data preservation at the inception of the case (which, for the plaintiff, precedes filing). It is necessary to take early, reasonable steps to ensure the protection of potentially responsive data because the negligence rationale of Residential Funding — as it applies to document destruction — is not limited to the period that commences with service of a document demand. Second, while there is no reason why counsel may not rely on a client to furnish the needed electronic expertise, it is not enough — whether the expert is in-house or outside — simply to rely on a statement of the expert that discovery demands cannot be honored because the expert is unable to retrieve the data that is sought. If the expert is in-house, moreover, any claim of inability is inherently suspect and will be subject to greater attack if the adversary’s expert proves able to retrieve the data. After the expert has been engaged, counsel must monitor the expert’s progress and, if he or she cannot retrieve the data from the underlying source, then counsel will have to consider whether supplemental expert assistance is required or whether the data source should be made accessible to the opponent (either directly or, perhaps, through an intermediary firm, if that is essential to preserve confidentiality). Third, while discovery is frowned upon in sanctions motions, the issue of retrievability and relevance of unproduced data may be discoverable. The court remanded for discovery in Residential Funding, thereby allowing depositions of affiants proffered by the nonproducing party below. Fourth, the fact that the missing electronic data proves to be irrelevant in fact is not necessarily a complete defense against sanctions — it is a defense against the sanction of an adverse inference (or any harsher sanction). The court may still impose a lesser sanction, such as an award of fees incurred in bringing the sanctions motion. If there is an appeal, the court may sanction a successful litigant by denying it post-judgment interest where, as in Residential Funding, the delay produced by the appeal on the discovery/sanctions issue is deemed a product of the sanctionable behavior. Fifth, just as the irrelevance in fact of the unproduced data is not a complete defense against sanctions, nor is the fact that the nonproduction is not made “with a culpable state of mind.” The absence of a culpable state of mind will not preclude the imposition of an appropriate sanction other (and lesser) than an adverse inference, such as an award of fees and costs. Nonproduction, alone, is sanctionable, under both Rule 37(b) (if it flouts an outstanding order of the court) or Rule 37(c)(1) (even in the absence of an order). The author, of Gregory P. Joseph Law Offices in New York, is a fellow of the American College of Trial Lawyers. If you are interested in submitting an article to, please click here for our submission guidelines.

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