To Preserve and Protect

by Tony Schoenberg

Every so often a case comes along that sends shivers down the spine. Although many lawyers are familiar with horror stories about e-discovery, they had not heard of an executive going to jail for defying court orders to preserve electronically stored information (ESI). At least not until federal magistrate Paul W. Grimm concluded last fall that the president of Creative Pipe Inc. was guilty of contempt because he refused to preserve, and in fact deliberately destroyed, pertinent ESI that could not be recovered. The court ordered the corporate executive imprisoned for up to two years unless and until he pays the attorneys fees and costs awarded to the plaintiff as a sanction for the executive's willful destruction of evidence (Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010)).

The Victor Stanley case bears extended discussion, not only because of the severity of the sanctions imposed, but also because Judge Grimm took the time to catalog the law in every circuit, thus providing a useful compendium for e-discovery practitioners who are struggling to understand and comply with their legal duties regarding ESI.

The case involved two competitors who manufacture and distribute site furnishings—benches, bike racks, trash receptacles, and related products. The dispute involved allegations that Victor Stanley's competitor, defendant Creative Pipe, wrongfully accessed the plaintiff's website under a fictitious name, downloaded the plaintiff's product drawings, and then passed them off as its own. Victor Stanley sued Creative Pipe and its executives for copyright infringement and other causes of action.

The president of Creative Pipe (who was named as a defendant) repeatedly destroyed evidence in bad faith, violated multiple preservation orders, and lied under oath about his actions. The court reviewed his conduct and held him in contempt for failing to implement a litigation hold, deleting email shortly after the plaintiff filed suit, and deliberately deleting ESI after the court issued preservation orders. In short, the offending executive not only refused to obey court orders but also took action in direct contradiction to the court's mandates.

To make matters worse, Creative Pipe's president offered implausible explanations for his actions, claiming, for example, that he put emails in his "deleted" message folder for storage purposes. The conduct was so damning that the defense attorneys stipulated to the sanction of entry of judgment on the copyright-infringement claim. Judge Grimm called the conduct "the single most egregious example of spoliation that I have encountered in any case that I have handled or in any case described in the legion of spoliation cases I have read in nearly fourteen years on the bench." (269 F.R.D. at 515.)

Concerned that the company president had not learned his lesson, the court used its civil contempt power to order the two-year jail sentence and sanctions.

A Legal Thicket
In an extremely thorough and thoughtful analysis, Judge Grimm acknowledged what many practitioners and in-house counsel have long believed: that the lack of uniform rules across the nation has created a situation in which parties lack clear guidance on ESI preservation obligations, which has led to significant increases in litigation costs. (269 F.R.D. at 516-517.)

To assist attorneys and their clients in navigating the thicket of jurisdictional differences, Judge Grimm's opinion provides a meticulous discussion of spoliation law not only in the District of Maryland and Fourth Circuit (where the Victor Stanley case was filed) but also in the other circuits. His stated intent was to "provide counsel with an analytical framework that may enable them to resolve preservation/spoliation issues with a greater level of comfort that their actions will not expose them to disproportionate costs or unpredictable outcomes of spoliation motions." (269 F.R.D. at 517.) A twelve-page appendix to the opinion describes and compares ESI spoliation standards in every circuit, complete with case citations and sub-issues.

The court's opinion itself sets forth a framework for analyzing spoliation claims. The analysis tracks four questions:

• Did the alleged spoliator breach a duty to preserve evidence?

• Did the person act with a culpable state of mind?

• What was the relevance of the lost evidence?

• What is the appropriate sanction?

Embedded within the Victor Stanley decision are a number of important points. First and foremost, the ruling reaffirms the near-universal principle that the duty to preserve is triggered as soon as litigation is reasonably anticipated.

Another significant issue addressed is proportionality. Judge Grimm rightly observed that the scope of a party's preservation duty should be "proportional to the amount in controversy and the costs and burdens of preservation." Indeed, he posits that an "assessment of reasonableness and proportionality should be at the forefront of all inquiries into whether a party has fulfilled its duty to preserve relevant evidence." (269 F.R.D. at 522-523.)

Culpability is also important. Indeed, it is the key factor in most decisions that impose sanctions. Experience teaches that when organizations have sound written policies and protocols regarding legal holds—and follow them—trouble rarely occurs.

Duty to Preserve
The most basic issue in any discussion of preservation is figuring out when a duty to preserve arises. The general standard is that the duty arises as soon as litigation is reasonably anticipated. Although that standard necessarily requires a fact-specific inquiry in any given case, certain bright-line rules apply across the board. For example, service of process triggers a duty of preservation for the recipient. So does service of a subpoena. Similarly, but perhaps less obviously, formal notice that a person or organization is a target of a governmental investigation also gives rise to a duty to preserve.

Other situations are more ambiguous. For potential defendants, receiving prelitigation demand letters may—or may not—create a duty to preserve. If a letter openly threatens litigation, it probably puts the recipient on notice that litigation is reasonably anticipated. If, on the other hand, the letter is conciliatory and invites settlement negotiations, it may not necessarily trigger a preservation duty.

For plaintiffs, the trigger generally occurs at the point when the party determines legal action is appropriate. That may occur when the party consults an attorney, sends a demand letter, or takes other action to prepare for litigation. It all depends on the circumstances.

Formal Policies
As noted, formal policies are helpful when it comes to a legal hold. If a company utilizes a written preservation protocol, specific decisions will usually be more defensible in court should they be challenged. To be effective, a policy should contain the criteria to be used in making the determination, and it might also set forth a reporting chain of command so information about potential litigation gets to the right person (or persons) charged with making the ultimate decision about whether a legal hold is called for. Helpful resources on this topic include the writings and publications of the Sedona Conference, specifically the Commentary on Legal Holds (available for free download at www.thesedonaconference.org).

Among the considerations are:

• The nature and specificity of the complaint or threat or reasonably anticipated claim

• The business relationship between the accused and accusing parties

• Whether the claimant is known to be aggressive or litigious

• Whether the company has learned of similar claims

• The experience of the industry

The above factors are neither compulsory nor exhaustive and may vary depending on the industry, organizational culture, and particular facts involved in a given scenario. Nonetheless, they provide a good sense of what the leading minds think about these issues.

Legal Hold
Once an organization determines that it is under a duty to preserve evidence, the next step is to implement a legal hold (also known as a "litigation hold"). Implementing a legal hold generally means asking custodians—usually the employees in possession of potentially relevant data—to take steps to preserve the information. Typically, the preservation request comes in the form of a memo circulated to the custodians, providing them with instructions about which materials need to be preserved, and how to proceed. Thus, a preliminary step in any legal hold is to identify the key players: Who, exactly, has control of the information that needs preservation? But don't start and stop with custodians; it is also important to communicate with IT personnel (or others with similar knowledge) to become familiar with an organization's data-retention policies and architecture and to understand how information is stored.

Also, legal holds should always be implemented in writing. Judge Shira Scheindlin, one of the nation's leading jurists on e-discovery issues, stated in a recent decision that failing to implement a written legal hold constitutes gross negligence and supports an award of sanctions when evidence is lost (Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of America Sec. LLC, 685 F. Supp. 2d 456, 464-465 (S.D.N.Y. 2010)).

Though there is no one-size-fits-all formula for drawing up legal-hold memos, some general guidelines are helpful:

BE SPECIFIC. Describe the litigation in a way that is understandable to the recipients of the memo. ("This is to let you know that we have been served with a lawsuit related to Acme's dynamite rocket pack. The suit alleges that patents owned by Wile E. Coyote are infringed. In light of this lawsuit, it is vital to continue to preserve all documents relating in any way to Project Roadrunner and the dynamite rocket packs currently being sold by Acme International—even if Acme's records-retention policy calls for their destruction—until you receive written clearance from the Acme Legal Department.")

DESCRIBE CATEGORIES OF INFORMATION. If appropriate, provide categories of documents covered by the hold. ("All documents that fall broadly into these categories should be preserved: (a) all documents relating to the dynamite rocket pack; (b) all documents relating to Acme's U.S. Patent No. 20 trillion (methods for formulating dynamite rocket packs); (c) all documents relating to any of the Defendants.")

BE INCLUSIVE. Mention potential sources of information, and give examples of what needs to be preserved. Err on the side of being broad and open-ended. ("When identifying documents responsive to this notice, the term "document" is expansive and includes, but is not limited to, all forms of recorded communication, such as drafts, notes (handwritten or typed), internal memoranda, reports and tables (either printed or on a computer), tapes, video, and electronic or computer records including emails and attachments.")

STATE CONSEQUENCES. Refer to potential consequences of noncompliance. ("Failure to preserve these materials could result in the imposition of harsh penalties or sanctions on both the company and/or individual employees.")

PROVIDE HELP. Tell custodians whom to contact if they have questions. ("If you have any questions about which documents should be preserved as a result of this notice, please contact Clarence Darrow at extension 296.")

FOLLOW UP. Legal-hold memos should be reviewed periodically and amended as new information comes to light. In addition, custodians should be monitored to ensure compliance. One useful technique is to require custodians to certify in writing that they are complying with a legal hold. Auditing and sampling can also promote compliance. At a minimum, periodic reminders should be sent to custodians, including, as needed, the reissuance of the legal-hold memo. Utilizing these follow-up measures demonstrates the good faith of a party's retention efforts and will, ultimately, make sanctions less likely.

Backup Tapes
In addition to circulating a legal-hold memo to custodians, the implementing party must suspend any policies under which documents are routinely or periodically destroyed, at least for those custodians who are subject to the legal hold. A frequent question is whether the routine overwriting of backup tapes must also cease. In most circumstances the answer seems to be no. The influential Sedona Principles state that "[a]bsent specific circumstances, preservation obligations should not extend to disaster recovery backup tapes created in the ordinary course of business." (Comment 5(h), The Sedona Principles (2nd ed. 2007).) According to the oft-cited Zubulake opinion, parties may continue to overwrite backup tapes unless they can identify the tapes that store the documents of "key players." (Zubulake v. UBS Warburg LLC ("Zubulake IV"), 220 F.R.D. 212, 218 (S.D.N.Y. 2003).) Parties need to be aware of this exception and take affirmative steps to ascertain whether their backup-tape systems fall within it.

Stay Flexible
Legal-hold obligations don't start and end with internal vigilance. If an organization has the right to control documents possessed by a third party, the organization may need to provide notice to that party about the need to preserve relevant material. In addition, parties should not lose sight of the concept of proportionality. The robustness of a legal hold should be commensurate with the size and complexity of the case. The key is to embody a reasonable and good faith effort to preserve relevant evidence.

Whatever the parameters of a given legal-hold plan, make sure to document all actions taken as part of it Indeed, lawyers who fail to do so act at their peril. This can be crucial if there is a challenge to a party's preservation efforts, especially if there is a motion for sanctions related to those efforts. Proper documentation can demonstrate that a party's efforts were, indeed, reasonable and undertaken in good faith. However, because such documentation may ultimately be shown to the court—or to an adversary—do not include within it any discussion of legal strategy or case analysis.

Parties may exercise flexibility in implementing legal holds, and judges and lawyers need to remember that no one is perfect. In the vast universe of ESI, it is likely, if not inevitable, that some information will be lost. The key to avoiding a result like that in Victor Stanley is to ensure that preservation actions are genuine and represent a reasonable, good faith effort to preserve relevant materials

Tony Schoenberg is a partner at Farella Braun + Martel in San Francisco and the founding member and head of the firm's E-Discovery Task Force.

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