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Judge Shira Scheindlin of the United States District Court for the Southern District of New York recently issued an important sequel to her landmark decisions on e-discovery in Zubulake v. UBS Warburg LLC.  In The Pension Committee Of The University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 U.S. Dist. Lexis 1839 (S.D.N.Y., January 11, 2010), Judge Scheindlin provides detailed guidance on what steps a party and its counsel should take when a duty to preserve arises, and the of the standards and burdens involved in a sanctions motion for a party’s spoliation of evidence.

 

While the University of Montreal case does not involve IP litigation, the implications of that decision in IP cases cannot be ignored.

 

 

The sanctions motion involved in the case stemmed from a lawsuit asserting violations of federal securities law and related claims brought by ninety-six plaintiffs.  During discovery, the defendants complained about the document productions of thirteen of the plaintiffs.  After the defendants raised the issue with the Court, the Court ordered that the plaintiffs provide declarations about their efforts to preserve and produce documents.  The defendants then took discovery of the declarants and subsequently brought a sanctions motion seeking to have the thirteen plaintiffs’ claims dismissed.

 

The facts relevant to each of the sanctioned plaintiffs are discussed at length in the opinion and are worth reviewing.  As the court noted, however, they are all things that have gotten litigants in trouble in the past.  They included: failing to implement a written litigation hold; failing to preserve any electronic records for several years after the litigation commenced; deleting electronic documents after a duty to preserve existed; failing to collect documents from key players; delegating search efforts without supervision; destroying back-up data; and submitting misleading or inaccurate declarations.  In discussing the merits of the case, Judge Scheindlin noted the well-known maxim that “those who cannot remember the past are condemned to repeat it.”

 

Because none of the plaintiffs involved acted willfully and/or intentionally, the Court declined to dismiss their claims.  However, the Court granted varying jury instructions on spoliation of evidence against the plaintiffs for their negligence and/or gross negligence.  In addition, the Court awarded monetary sanctions against the plaintiffs in the form of reasonable costs and attorneys fees to compensate the defendants for the fees incurred in litigating the sanctions motion. 

 

The Court noted that discovery misconduct includes behavior that varies over a wide spectrum of culpability.  Conduct can range from negligence on the one hand to gross negligence and even willful and intentional misconduct on the other.  Of particular note to practitioners and litigants is the Court’s classification of certain types of discovery behavior as gross negligence - conduct sufficient in the Court’s eyes to presume both relevance of the spoliated evidence and prejudice to the innocent party absent rebuttal evidence.  According to the Court:

 

After a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence.  Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached:  to issue a written litigation hold, to identify the key players and to ensure that their electronic and paper records are preserved, to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control, and to preserve backup tapes when they are the sole source of relevant information or relate to key players.

 

Given the potential ramifications of a finding of gross negligence in connection with a party’s failure to comply with its discovery obligations, the Court’s analysis of when a duty to preserve attaches and the consequences for failing to meet that duty are very useful.

 

 

For a defendant who is sued “out of the blue”, a duty to preserve may arise only upon learning of the lawsuit.  However, that is just one of many potential scenarios involving the duty to preserve.  In this case, the Court set forth a general rule and held that the duty to preserve arises when a party “reasonably anticipates” litigation.  That time is fact-dependent and may be before a complaint is filed - particularly for a plaintiff.  A plaintiff’s duty may arise pre-suit because it controls the timing of the litigation.

 

At the point that the duty to preserve arises, a party must suspend its routine document retention/destruction policy and put in place a “litigation hold” to ensure the preservation of relevant documents.  According to the Court, that litigation hold should be in writing - otherwise, the party is acting in a grossly negligent manner.

 

 

Discovery can be both costly and complicated.  More fundamentally, discovery is conducted by people - both litigants and their counsel - and their behavior and efforts vary from case to case.  On the one extreme are parties that intentionally destroy or alter documents.  They undoubtedly are asking for trouble.  On the other hand - and by far the most common situation in litigation - are parties who fall short of their discovery obligations based on oversight or inadvertance.  For example, the party may not have collected documents from a person of tangential relevance to the litigation or did not take “all” steps to preserve “all” electronic documents.  These parties are potentially “negligent” under the Court’s reasoning, and the Court’s analysis of appropriate burdens, sanctions and remedies is instructive.

 

Initially, the Court noted that each claim of discovery misconduct must be evaluated on its own facts and that there are no hard and fast rules for deciding sanctions motions.  In addition, the Court provided extensive discussion about how the burdens shift depending on the culpability of the spoliating party and the sanctions sought.

 

The Court noted that the burden of proof and the focus of the analysis differs depending on the severity of the sanction.  When the sanction is less severe (e.g.,  additional discovery, fees or cost shifting) - the behavior of the spoliating party is the focus of the inquiry.  In contrast, when the sanction is far more serious - dismissal, preclusion, or an adverse inference instruction - the court looks at more than the conduct of the spoliating party.  In the latter situation, the Court must also look at whether any missing evidence is “relevant” and whether the innocent party has been prejudiced.

 

“Relevance” in the context of a sanctions motion means more than responsive to a document request or sufficient to satisfy Rule 401 of the Federal Rules of Evidence.  Instead, the innocent party must show that the evidence would have been helpful in proving its claims or defenses (i.e., it has been prejudiced without the evidence).  And the Court noted that proof of relevance does not necessarily equal proof of prejudice.

 

The Court set forth the following test to evaluate sanctions motions.  The movant must demonstrate that the spoliating party: (1) had control over the evidence and an obligation to preserve it at the time of destruction; (2) acted with a culpable state of mind upon destroying or losing the evidence; and (3) that the missing evidence is relevant to the innocent party’s claim or defense. 

 

Relevance and prejudice may be presumed when the spoliating party acted in bad faith (i.e., intentionally) or in a grossly negligent manner. However, gross negligence does not require application of a presumption.  It merely permits a presumption.  On the other hand,  if a party is “only negligent” (and this is the most common situation in litigation), then the innocent party must prove both relevance and prejudice. 

 

 

According to the Court, the innocent party may meet its burden by “adducing 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.” (internal quotations omitted).  That is, the party may present extrinsic evidence tending to show that the destroyed records (either paper or electronic) would have been favorable to its case.   However, the court cautioned that the innocent party should not be held to too high a burden of proof.  To do so might reward the spoliating party for its destruction of evidence.

 

 

If a presumption of relevance and prejudice is permitted (due to gross negligence) or warranted (due to intentional misconduct), the spoliating party must be given an opportunity to rebut it.  In fact, the court noted that any presumption can be rebutted - regardless of the level of culpability.  In short, the spoliating party should always have the opportunity to demonstrate that  the innocent party has not been prejudiced by the absence of the missing information.  According to the Court, there are important policy reasons to allow a spoliating party the opportunity to rebut any presumption.  Were that not the case, there would be a strong incentive to search for and uncover any spoliation no matter how insignificant and turn the litigation into a trial about spoliation instead of a trial on the merits.

 

A spoliating party may rebut a presumption in a several ways.  For example, the spoliating party may rebut a presumption by demonstrating that the innocent party has/had access to the evidence alleged to have been destroyed.  Alternatively, the spoliating party can show that the evidence would not have supported the innocent party’s claims or defenses.  If the spoliating party rebuts a finding of prejudice, then no jury instruction on spoliation should be given at trial.  Nevertheless, the court noted that a lesser sanction may still be warranted even where a presumption is successfully rebutted and this may include monetary sanctions.

 

 

The Court noted that it should impose the least harsh sanction that can provide an adequate remedy to the innocent party.  These sanctions range from (least harsh to most harsh) further discovery, cost shifting, fines, special jury instructions, preclusion, entry of a default judgment, or dismissal.  Terminating sanctions (such as a default judgment or dismissal) should only be used in the most egregious cases - those involving intentional and/or willful discovery misconduct.

 

With regard to adverse inference instructions, the Court noted that there are a continuum of instructions available to address varying degrees of discovery misconduct.  The harshest instructions include instructions that deem certain facts admitted and/or that certain facts must be accepted by the jury as true.  In contrast, the least harsh instructions permit a jury to presume that the lost evidence is both relevant and favorable to the innocent party.

 

Monetary sanctions are also a possibility.  They may be appropriate to compensate the movant for the reasonable costs of bringing a meritorious motion for sanctions - even in addition to an adverse inference instruction.  That was the exact relief Judge Scheindlin granted the defendants in this case.

 

 

IP litigants already face extraordinary pressure to comply with the evolving standards of e-discovery.  Cost management aside, the procedural and substantive pitfalls of e-discovery in the technology-related facts buried in years’ worth of electronic records typically involved in IP cases make careful attention to guidelines, such as those in the University of Montreal decision, imperative. Given the attention other courts have paid to Judge Scheindlin’s prior e-discovery decisions, IP counsel cannot afford to be unaware of her decisions.