Complex commercial litigation is costly and disruptive. That has long been the case, but over the past 20 years those costs—particularly the costs of discovery—have grown exponentially. Much has been written about this issue, and many competing solutions have been proposed, some of which are embodied in the proposed amendments to the Federal Rules of Civil Procedure published for comment this summer. While there is substantial disagreement about the right way to combat this growing problem, there is no real question about its source: the explosive growth of electronically stored information (ESI) in organizations large and small, and the failure of discovery rules and practices to account for that change.
Of course, ESI has been a major component of discovery for decades, but 20 years ago a company tasked with collecting its ESI faced a fairly limited task: For each relevant employee, it might have to search a group of electronic documents, an internal email address and calendar, and perhaps some relevant internal databases. Now, those same employees likely use several email addresses (personal and corporate), electronic calendars and contact lists, text messaging, instant messaging, voicemail, BlackBerry services (including messaging, calendars, contacts and emails), electronic documents (stored on local computers, flash drives, company servers and in the cloud), social media accounts, websites and a host of complex proprietary data sources maintained by the company or its vendors. All of these resources—and their backups—are potential sources of discoverable ESI, and in many large organizations, there is no single person who can even identify them all, much less search them or collect from them.
Thus, an attorney tasked with discovery in any complex case must begin by having a detailed conversation with the client about every potential source of ESI and the methods available for preserving, collecting and reviewing it. Identification and preservation of every possible source of ESI is a critical first step because, notwithstanding the modern trend to limit discovery of ESI in some cases, there is no such limit on the obligation to preserve the information in the first place. Even if it turns out that some ESI is beyond the scope of discovery, that does not mean it can be disposed of before that determination has been made, and while the cost of preserving all this information can certainly be high, the costs of improperly destroying it—called "spoliation"—may be far higher. Sekisui American v. Hart,1 a recent decision by Judge Shira Scheindlin of the Southern District of New York, serves as a reminder of how the process can go wrong.
Scheindlin's 'Zubulake' Opinions
Ten years ago, Judge Scheindlin essentially wrote the book on ESI preservation and production in a series of opinions in Zubulake v. UBS Warburg. In those opinions, Scheindlin outlined when a litigant's duty to preserve documents attaches, what a litigant must do to preserve and collect information once that duty attaches, and when sanctions may be appropriate for the failure to adhere to these obligations.2 Of particular importance are Zubulake IV and Zubulake V, which together fundamentally changed the landscape of litigation regarding ESI discovery obligations in the federal and state courts.3
In Zubulake IV, Scheindlin discussed the important questions: "When does the duty to preserve attach, and what evidence must be preserved?"4 Scheindlin answered those questions as follows: "Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents."5 Reasonable anticipation of litigation is defined broadly and does not require formal notice of claims.
Zubulake V further refines the standard with several specific requirements: First, "counsel must issue a 'litigation hold' at the outset of litigation or whenever litigation is reasonably anticipated." Second, "counsel should communicate directly with the 'key players' in the litigation" regarding their preservation duties. Third, "counsel should instruct all employees to produce electronic copies of their relevant active files" and "make sure that all backup media which the party is required to retain is identified and stored in a safe place."6 These requirements have been widely adopted, though there has been substantial variation in how courts have treated litigants who fail to abide by them.
Last month, in the Sekisui case, Judge Scheindlin addressed one such litigant. Her opinion addresses the question of when the destruction of ESI should be considered willful and prejudicial—thus making an "adverse inference" jury instruction appropriate. But Scheindlin also uses the opinion to provide her negative view of the proposed changes to Fed. R. Civ. P. 37(e), which were published for comment by the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States Courts (the Rules Committee) the same day as the Sekisui opinion was handed down. The court's message to litigants (and the Rules Committee) is that the risk of destruction of ESI must fall on the party who controls the documents, not on the innocent party seeking them, and that the rules must not be interpreted (or written) to incentivize the "careless" destruction of potentially relevant information.
Sekisui presents a study in how to fail at document preservation. Sekisui acquired a company called America Diagnostica Inc. (ADI) from Richard Hart and Marie Louise Tudel-Hart in 2009. In October 2010, Sekisui determined that the Harts had breached certain representations made in connection with the sale. Accordingly, Sekisui sent the Harts a notice of claim in which it threatened a lawsuit. Sekisui did not file suit, however, until May 2012. Although Sekisui—the potential plaintiff—obviously "reasonably anticipated" litigation in October 2010, it did not institute a litigation hold until January 2012. In the meantime, Sekisui permanently deleted the emails of two key employees, including Richard Hart—the very individual it had threatened to sue.7
Discovery regarding the spoliation was damning. In March 2011, an ADI employee named Dicey Taylor, after determining that additional space was needed on ADI's server, unilaterally reviewed Hart's emails, printed those she "deemed pertinent," and then instructed ADI's IT vendor to delete the entire mailbox, over the recommendation of the vendor that it be backed up. In October 2011 (one year after the notice of claim was sent and three months before the litigation hold was issued), Taylor also instructed the IT vendor to delete the email files of the ADI employee formerly responsible for FDA compliance.8
Defendants moved for sanctions for spoliation, and the motion was referred to the magistrate judge. The magistrate judge denied the motion, noting that, although the destruction of the ESI "may well rise to the level of gross negligence," it was not done for "any malevolent purpose." He therefore held that Sekisui had not acted with the culpable state of mind necessary to issue sanctions.
Defendant objected to the report and the court agreed, rejecting the magistrate's recommendation and awarding sanctions. The court's opinion relies on the Second Circuit's opinion in Residential Funding v. DeGeorge Financial,9 which permits the jury to draw an adverse inference where (1) the party against whom the inference is sought had a duty to preserve; (2) the party destroyed the documents with a "culpable state of mind"; and (3) the destroyed documents were relevant.10
Applying this standard, the court held that the destruction was willful, "[b]ecause Hart's ESI was destroyed at the direct request of an ADI employee after the duty to preserve had attached" and "the law does not require a finding of malevolence to constitute willfulness in the context of spoliation."11 The court further found that Sekisui's failure to preserve documents was grossly negligent because (1) the litigation hold was issued 15 months after the notice of claim was sent; and (2) Sekisui did not notify its IT vendor of the litigation hold until six months after it was issued (and one month after the complaint was filed).12
Sekisui did not seriously dispute the relevance of the destroyed ESI, given that the documents in question belonged to a defendant and another individual whose role was directly relevant to its claim. Accordingly, the question of sanctions turned on the magistrate's determination that defendants "failed to show that 'relevant information potentially helpful to them is missing.'"13 In short, the magistrate recommended that no adverse inference instruction be given because defendants could not prove they were prejudiced by the destruction of the particular ESI at issue.
Judge Scheindlin rejected this finding, noting that "[t]o shift the burden to the innocent party to describe or produce what has been lost as the 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. Prejudice is presumed for the purposes of determining whether to give an adverse inference instruction when, as here, evidence is willfully destroyed by the spoliating party."14 As a result, the court held that the jury would be instructed that it was entitled (but not required) to draw an adverse inference against Sekisui based on spoliation.15
Given the egregious facts in Sekisui, the court's ruling is not particularly surprising. Somewhat more noteworthy is that Judge Scheindlin took the opportunity to comment publicly on the proposed changes to Rule 37(e), published for comment by the Rules Committee that same day.16 The Committee has noted that its proposed rules are expressly designed to overrule the Residential Funding case:
[T]he amended rule makes it clear that—in all but very exceptional cases in which failure to preserve "irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation"—sanctions (as opposed to curative measures) could be employed only if the court finds that the failure to preserve was willful or in bad faith, and that it caused substantial prejudice in the litigation. The proposed rule therefore rejects Residential Funding v. DeGeorge Fin., 306 F.3d 99 (2d Cir. 2002), which stated that negligence is sufficient culpability to support sanctions.17
Thus, the proposed rules would allow sanctions:
only if the court finds that the party's actions (i) caused substantial prejudice in the litigation and were willful or in bad faith; or (ii) irreparably deprived a party of any meaningful opportunity to present or defend against the claims in the litigation.18
In a strongly-worded footnote in Sekisui, Scheindlin expressed her strong disagreement with this view, noting that the proposed rule would improperly place the burden of proving prejudice on the innocent party. She further noted that "imposing sanctions only where evidence is destroyed willfully or in bad faith creates perverse incentives and encourages sloppy behavior."19 Coming, as they do, from a respected federal judge who is also a leading judicial authority on ESI, these comments are hard to ignore. Whatever the outcome of this debate, it will have a serious impact on New York litigants not limited to the federal courts. Not only would adoption of the proposed rule overturn Residential Funding and with it the current New York federal court standard, but it would also uproot developing New York state jurisprudence, which has generally followed the broad standards set forth by New York federal courts.20
The proposed revisions to Rule 37 will not be implemented—if at all—until at least sometime in 2014, and Sekisui makes clear that there is a very active debate about the appropriate scope of those revisions. Until that debate is resolved, the best assumption for New York practitioners is that preservation obligations are broad and the standard of care is high. It may be that much of a client's ESI is outside the scope of discovery, but in the present environment that determination should be made in the production stage, not the preservation stage. The risk of improper destruction—and the sanctions that may come with it—is otherwise simply too great.
Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex commercial and intellectual property litigation. Angela L. Harris, an associate at the firm, assisted with the preparation of this article.
1. No. 12 Civ. 3479, _ F. Supp.2d _, 2013 WL 4116322 (S.D.N.Y. Aug. 15, 2013).
2. See Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. 2003) (Zubulake I); Zubulake v. UBS Warburg, 230 F.R.D. 290 (S.D.N.Y. 2003) (Zubulake II); Zubulake v. UBS Warburg, 216 F.R.D. 280 (S.D.N.Y. 2003) (Zubulake III); Zubulake v. UBS Warburg, 220 F.R.D. 212 (S.D.N.Y. 2003) (Zubulake IV); Zubulake v. UBS Warburg, 229 F.R.D. 422 (S.D.N.Y. 2004) (Zubulake V).
3. See VOOM HD Holdings v. EchoStar Satellite, 93 A.D.3d 33 (1st Dept. 2012) (noting that Zubulake "has been widely adopted by federal and state courts" and "provides litigants with sufficient certainty as to the nature of their obligations in the electronic discovery context and when those obligations are triggered").
4. Zubulake IV, 220 F.R.D. at 216.
5. Id. at 218.
6. Zubulake V, 229 F.R.D. at 433-34.
7. Sekisui, 2013 WL 4116322, at **1-2.
8. Id. at *3.
9. 306 F.3d 99 (2d Cir. 2002).
10. Sekisui, 2013 WL 4116322, at *4 (quoting Residential Funding, 309 F.3d at 107).
11. Id. at *5.
12. Id. at *6.
13. Id. at *7 (citing Sekisui Am. v. Hart, No. 12 Civ. 3479, 2013 WL 2951924, at *5 (S.D.N.Y. June 10, 2013)).
15. Id. at *8.
16. See Comm. on Rules of Prac. & Proc. of the Judicial Conference of the United States, Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure, August 2013, at http://www.uscourts.gov/uscourts/rules/preliminary-draft-proposed-amendments.pdf (Proposed Amendments).
17. Id. at 272.
18. Id. at 314-17 (proposed Rule 37(e)(1)(B)).
19. Sekisui, 2013 WL 2951924, at *4 n.51.
20. See, e.g., VOOM HD Holding v. EchoStar Satellite, 93 A.D.3d 33, 47 (1st Dept. 2012) (presumption of prejudice applied because ESI was destroyed either in bad faith or with gross negligence, and adverse inference was appropriate sanction).