U.S. District Judge Shira A. Scheindlin’s recent decision in Sekisui American v. Hart1 underscores the reality that the destruction of electronic evidence may lead to sanctions even when done without malice. Other case law has held that a litigant may be held responsible for the destruction of data that is outside of its actual possession—including, potentially, data in the possession of its employees, service providers, and other entities with whom the litigant has contracted. To avoid the problems that arise from the destruction of evidence, companies must ask themselves proactively, “Where’s my data?” not merely at the outset of a litigation, but in the early stages of any relationships with others who may come to possess materials that companies may later need to preserve, collect and produce.

Malice Not Required for Imposing Sanctions

In Sekisui, Judge Scheindlin held that, when electronic evidence has been destroyed willfully or through gross negligence, no finding of malice is necessary for the imposition of sanctions. The decision raises the stakes for companies’ management of their electronic data and other records.

Sekisui involved the acquisition by the plaintiff of a company owned by the defendants. The email data for two people, including one of the defendants, was in the possession of a vendor that provided information technology services to the plaintiff. Prior to receiving a litigation hold, the vendor, acting on the instruction of the plaintiff’s employee, deleted the email data. The plaintiff’s employee claimed to have ordered the deletion in order to free up space on the company’s server. Initially, the magistrate judge declined to impose sanctions because he concluded that the destruction was not willful because there was no showing of “malevolent purpose.” Scheindlin reversed, relying on the Second Circuit’s decision in Residential Funding v. DeGeorge Financial to hold:

[T]he law does not require a finding a malevolence to constitute willfulness in the context of spoliation…. In the context of an adverse inference analysis, there is no analytical distinction between destroying evidence in bad faith, i.e., with a malevolent purpose, and destroying it willfully.2

The plaintiff’s purported good faith explanation for the destruction of the email therefore was unavailing.

Scheindlin further held that when evidence is destroyed willfully or with gross negligence, relevance and prejudice to the innocent party may be presumed.3

Scheindlin also clarified that, separate from the destruction of the email data, the actions of the plaintiff with respect to its document retention practices constituted gross negligence.4 Scheindlin’s finding was based on the fact that the plaintiff did not issue a litigation hold until 15 months after sending a notice of claim and did not notify its vendor of the litigation hold until six more months had passed.

The court ordered an adverse inference and monetary sanctions against the plaintiff.

Sekisui points to the importance of thoroughly considering the “Where’s my data?” question when litigation is on the horizon. Even a timely litigation hold will fall short if it is not distributed to vendors and others outside the company who may have relevant material. Had the IT vendor in Sekisui received the hold prior to the instruction to destroy data, the vendor may have objected to or at least questioned the instruction from the employee, with the likely result that the litigation hold would have been enforced and the data would have been preserved.

The failure to adequately distribute a litigation hold also means that a litigant has little protection if the vendor deletes the data of its own accord (rather than, as in Sekisui, at the direction of the litigant). If a litigant fails to distribute a litigation hold to its vendor, the litigant may be found grossly negligent in its document retention policies even without having willfully destroyed the data.

Broad Understanding of Party’s ‘Control’

With high stakes for proper electronic document preservation, it is more important than ever that litigants fully understand what data they are responsible for preserving, including that in the possession of third parties.

Under the Federal Rules of Civil Procedure, a party may request that another party produce documents or electronically-stored information within that party’s “possession, custody, or control.”5 The same standard applies regardless of where and how the information is stored—on paper in the litigant’s office, on the litigant’s in-house computer system, or with a data storage service, including when the data is stored in “the cloud.”

“Control” has been construed broadly in the Second Circuit, and does not depend on the location of the documents or legal ownership. A party that is not in actual possession of a document nonetheless may have control over it under Rule 34(a)(1), by having either the practical ability to obtain it or the legal right to do so.6

Under this broad concept of “control,” a litigant normally would be considered to have control of data stored by a provider of offsite data services, such as a cloud computing vendor. Courts also have found that a litigant may be found to control documents in the possession of its current or former legal counsel, particularly where it is undisputed that the attorney would have disclosed the files to the litigant if requested.7 Additionally, there are other, less obvious potential data locations that a litigant may be held responsible to preserve and produce.

For example, in In re NTL Securities Litigation, a defendant was found to have control over relevant documents in the possession of a separate company based on a document-sharing clause in an agreement and testimony regarding its practical ability to access the documents.8 NTL entered bankruptcy and two separate companies emerged, dubbed “NTL Europe” and “New NTL” by the court. In a discovery dispute, NTL Europe contended that it did not have control over relevant documents, which were in the possession of nonparty New NTL. The court rejected this argument, finding that NTL Europe had both the legal right and the practical ability to obtain any documents in New NTL’s possession. First, a document-sharing clause in the de-merger agreement made it clear that New NTL was to make available to NTL Europe any documents that it needed to be able to comply with its legal obligations. Second, NTL Europe’s practical ability to obtain the documents was evidenced by testimony from its CEO, who stated that whenever the company needed a document in New NTL’s possession, the company would request it from New NTL and New NTL would comply. The court held that NTL Europe therefore was responsible for the preservation and production of the documents.

NTL has been relied upon in a wide variety of contexts. For example, Judge Scheindlin has held that, when employees perform work on their personal computers that is relevant to issues in a litigation, the employer has an obligation to search those personal computers for relevant documents.9 The employer may also be obligated to request documents from former employees (where the employer has “practical ability” to do so).

Similarly, earlier this year, NTL was cited in an employment discrimination case in which the relevant files were not in the possession of the defendant employer, but rather were possessed by a temporary staffing agency used by the defendant.10 The defendant was directed to determine whether it could obtain copies of a certain employee’s personnel file from the staffing agency.

Some courts may also require that, where a litigant is aware of potential evidence in the possession of a third party but does not have ownership or control of potential evidence and therefore cannot preserve it, the litigant should give the opposing party notice of access to the evidence or its potential destruction.11

Possible Sanctions

As these cases show, litigants assume risks when taking a purely formalistic approach when determining where their data is located and to whom they should issue a litigation hold. Importantly, a litigant could be held responsible for the destruction of evidence by others if a court finds retrospectively that the documents were in the litigant’s functional control. Recent case law demonstrates that it is not necessary for the litigant to have taken any affirmative steps to cause the destruction to be subject to sanctions.

If litigant is informed by a person in possession of relevant documents that the documents are going to be destroyed and is given the opportunity to take custody of them, the litigant may be found to have functional control over the documents. If the litigant recognizes the documents’ relevance to the litigation, the litigant may be obligated to preserve them and could be held responsible for permitting their destruction. This is true even if the documents in question were never in the litigant’s custody and it took no affirmative action to destroy them. If both sides of the litigation are alerted that the documents will be destroyed but only one party is aware of their relevance, that party alone could be held responsible for their destruction. In one such case, the party was found grossly negligent and subject to sanctions.12

In another case, the plaintiff was found to have control over documents in the possession of a third-party litigation consultant that was expected to provide expert testimony at trial. The court held that “common sense” suggested that the plaintiff could have obtained the documents from the consultant merely by asking for them, and that the consultant would have honored a request by the plaintiff that the documents be preserved. The plaintiff failed to direct the consultant to preserve the documents, and they apparently were destroyed by the consultant in its normal course of business. Although the court found that the plaintiff had functional control over the documents, it declined to issue sanctions because the plaintiff sufficiently demonstrated that the defendant was not prejudiced.13

Taking Control of Documents

Although many companies now are savvy about the need to alert their data service providers when they issue litigation holds, some choose not to extend the hold to other entities with whom they have relationships and who may have relevant documents, including providers of computing and professional services and other entities they have contracted with.

In addition, companies often do not consider the benefits of assessing their potential discovery needs long before they become an issue in a litigation. At the outset of any relationship that may involve the creation or storage of records that could be relevant to future litigation, companies should consider the possible implications of that relationship in a litigation scenario. In particular, before entering into any agreement with a document-sharing clause, clients should consider whether the benefits of the agreement will outweigh potential discovery headaches in the future.

Companies increasingly are engaging vendors for data storage or other services that impact information technology. When engaging with an IT vendor, a company should determine how its normal data retention policies would play out if that vendor were part of the picture. The company also should assess how a litigation hold would be effected, including how quickly a hold could be put into place and for how long.

When the time comes that a litigation hold should be issued, it should of course be done promptly, and there should be diligent follow up with all of its recipients to be sure that the hold is being honored.

With increasing reliance on technology, keeping records of where data is located and how to manage it in a litigation context may seem daunting. But as Sekisui demonstrates, there may be little forgiveness for errors, especially when they are egregious. Prevention is the best cure for discovery problems. Attention to e-discovery issues early on, and regularly, will pay off later. With a proactive approach, should litigation arise, the answer to “Where’s my data?” will already be clear.

Barry M. Kazan is a partner and Emily J. Mathieu is an associate at Thompson Hine in New York.

Endnotes:

1. 2013 U.S. Dist. LEXIS 115533, No. 12 Civ. 3479 (S.D.N.Y. Aug. 15, 2013).

2. Id. at *27 (citing 306 F.3d 99 (2d Cir. 2002)).

3. Id. at *21-22; see also Ahroner v. Israel Discount Bank of N.Y., 2009 NY Slip Op 31526(U), 19 (N.Y. Sup. Ct. July 9, 2009).

4. 2013 U.S. Dist. LEXIS 115533, at *31-32.

5. Fed. R. Civ. Pro. 34(a)(1).

6. E.g., In re NTL Securities Litigation, 244 F.R.D. 179 (S.D.N.Y. 2007).

7. See, e.g., MTB Bank v. Federal Armored Express, 1998 U.S. Dist. LEXIS 922, No. 93 Civ. 5594 (LBS) (S.D.N.Y. Feb. 2 1998).

8. Id.

9. Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456, 482 (S.D.N.Y. 2010).

10. Pinkard v. Baldwin Richardson Foods, 2013 U.S. Dist. LEXIS 45882, No. 09-CV-6308T (W.D.N.Y. March 28, 2013).

11. See GenOn Mid-Atl v. Stone & Webster, 282 F.R.D. 346, 354 (S.D.N.Y. 2012).

12. In re WRT Energy Secs. Litig., 246 F.R.D. 185, 195 (S.D.N.Y. 2007).

13. GenOn, 282 F.R.D. at 353, 358.