Good Company

Don't Get Caught With Your Zip Drive Open: Essential Compliance Tips For Storage and Disclosure of Electronically Stored Information

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FIRST OF TWO-PART SERIES 

Introduction

Welcome to the (electronic) jungle.

Recent studies reveal that up to 95% of all new information created in the business world is now generated and saved in electronic form without ever being reduced to paper. Every day, billions of emails cross the Internet and are saved and stored in an electronic format. For these reasons, ESI is an ever-increasingly critical source of evidence in business litigation. When a dispute begins, a treasure trove of evidence lies brimming within a company's computer systems and other electronic storage devices, just waiting to be discovered. Depending on whether you are prosecuting or defending the case, the existence of that evidence can be cause for celebration or panic.

How the President/CEO or HR professional responds when such a dispute erupts or can be "reasonably anticipated" can save or cost your company tens of thousands or even hundreds of thousands of dollars, and, if mishandled, can cost you the lawsuit. Your responsibilities with respect to your company's ESI break down into two distinct areas: (I) Understanding Your Duty to Preserve ESI; and (II) Developing and Implementing an Effective ESI Retention/Destruction Policy to manage that process. We'll take up the first part this month, and the second part next time.

Remember that ESI retention issues do not just apply to large corporations, or in multi-million dollar litigations. A party's common-law duty to preserve ESI applies in every type of case regardless of the amount in controversy. The standard of conduct for parties engaged in discovery is to do that which the courts have determined that a party must do "to participate meaningfully and fairly in the discovery phase of a judicial proceeding."

UNDERSTANDING YOUR DUTY TO PRESERVE ESI

Zubulake v. UBS Warburg was a case heard in the United States District Court for the Southern District of New York between 2003 and 2005 wherein the Plaintiff, Laura Zubulake - a securities trader for UBS Warburg sued her former employer for gender discrimination and retaliation after she was allegedly subjected to improper sexual conduct and passed over for a promotion. The case produced 5 separate judicial opinions that have driven much of the legal doctrine governing a company's responsibilities to preserve and produce ESI when a lawsuit is reasonably anticipated. 

Plaintiff Zubulake argued that that evidence critical to her ability to prove her case was located in various emails exchanged among employees of Defendant UBS Warburg that Warburg had not produced. Zubulake knew that additional relevant email existed because she had already gathered exemplars of it from other sources. Accordingly, Zubulake requested that Warburg search its backup tapes and other archiving media to properly produce the relevant evidence she requested. Warburg, arguing undue burden and expense, took the position that if Zubulake wanted Warburg to undertake such a search, she should pay for it.

The court ruled that the question of whether producing documents is too burdensome or expensive turns on whether the documents sought are kept in an "accessible or inaccessible format" and that the issue of accessibility depends on the media on which those documents are stored. The Court then identified five general respositories of ESI: (1) online data, including hard disks; (2) near-line data, including optical disks; (3) offline storage such as magnetic tapes; (4) backup tapes; and (5) fragmented, erased and damaged data, and concluded that only the latter two categories — backup tapes and fragmented, erased or damaged data were "not readily available" and thus subject to cost-shifting. The court then created a new seven-factor test to better govern the question of when costs should be shifted in ESI discovery:

1. The extent to which the request is specifically tailored to discover relevant information;
2. The availability of such information from other sources;
3. The total cost of production, compared to the amount in controversy;
4. The total cost of production, compared to the resources available to each party;
5. The relative ability of each party to control costs and its incentive to do so;
6. The importance of the issues at stake in the litigation; and
7. The relative benefits to the parties of obtaining the information.

After applying the seven—factor test, the Court determined that Plaintiff Zubulake should be responsible for 25 percent of the costs of restoring and searching the backup tapes, excluding attorney time. This finding reinforced the general presumption that the cost of producing documents lies with the responding party — even when ESI is involved. It also reiterated that cost-shifting would be entertained only when inaccessible ESI is sought, and even then, only after the fact-specific seven part test concludes that cost-shifting is appropriate.

This first of the Zubulake rulings underscores the importance of having your ESI stored in an organized, sensible way — since one day, you may be ordered to produce documents from it, and to bear all the costs of doing so. As the foregoing discussion illustrates, claims of undue burden due to your own disorganization will not save you. Here, an ounce of prevention may be worth a pound of cure — since the cost of forensic searches of disorganized backup data, particularly when they have to be done under exigent circumstances, can run in the many tens of thousands of dollars.

Rejoining our running example - during the Zubulake backup tape restoration effort (funded 75 percent by Warburg) it was determined that relevant email had been deleted from Warburg´s active email system and were now only accessible on backup tapes, and that some of Warburg's backup tapes were also no longer available. In light of these facts, Plaintiff Zubulake sought an order requiring Defendant Warburg to pay for the total costs of restoring all of the remaining backup tapes, the costs for redeposing some witnesses, and an "adverse inference instruction" — an instruction to be given to the jury at the close of evidence that the jury could conclude that the destroyed emails would have contained evidence damaging to Warburg's defense. The court found that Warburg had a duty to preserve the destroyed evidence since it should have known that it would be relevant to the litigation, ordered Warburg to cover all the costs to restore the remaining backup tapes as Zubulake had requested, but initially held off on awarding the adverse inference instruction.

As discovery continued, however, it became clear that Warburg had failed to take all necessary steps to guarantee that relevant data was both preserved and produced. Because certain emails and backup tapes had been deleted, Warburg was unable to recover certain key documents, including portions of email communications exchanged between key parties in the case. Although Warburg did successfully recover some of the deleted email, Plaintiff Zubalake correctly contended that Warburg had prejudiced her ability to put on her case. In light of these developments, the Court granted Plaintiff Zubulake's motion for sanctions, and this time ruled that the jury would be given an adverse inference instruction. Specifically, the court concluded that attorneys are obligated to assist their clients to ensure that all relevant documents are discovered, retained, and produced, and must guarantee that relevant documents are preserved by instituting a litigation hold on relevant information, including safeguarding archival media, as soon as litigation can be reasonably anticipated.

In the final instructions to the jury the Court instructed in part, "[i]f you find that UBS could have produced this evidence, the evidence was within its control, and the evidence would have been material in deciding facts in dispute in this case, you are permitted, but not required, to infer that the evidence would have been unfavorable to UBS." The jury found in Zubulake's favor on both claims awarding compensatory and punitive awards totalling over $29 million dollars.

Zubulake and later cases interpreting it, including Qualcomm[1], Pension Committee[2], and Rimkus[3] make clear that parties and their counsel must take the reasonable steps to preserve ESI as soon as litigation can be reasonably anticipated. That does not mean that a company must preserve every file, email and backup tape. In the face of continued failures by parties and their counsel to identify, preserve and produce relevant ESI, and in turn, harming the integrity of the judicial process, however, three federal courts have, post-Zubulake, upped the ante for companies and their counsel to meet their discovery and preservation obligations.

In Qualcomm, a patent-infringement case, the Court concluded that Qualcomm's conduct in the litigation had undermined the legitimacy of the litigation process. Qualcomm had produced over a million pages of marginally relevant documents while hiding 46,000 critically important ones, and had conducted its own due diligence as to the location of and search for electronic records. The Court found that "attorneys must take responsibility for ensuring that their clients conduct a comprehensive and appropriate document search," and that Qualcomm's attorneys should have "insisted on reviewing Qualcomm's records regarding the locations searched and terms utilized." According to the Qualcomm Court, delegating the document search to the client, without direct oversight by outside counsel, did not satisfy the attorneys' discovery obligations. The Court found that four factors led to the massive discovery failure:

1. an incredible breakdown in communication
2. a lack of agreement regarding who would be responsible for document collection and production
3. an incredible lack of candor on the part of the principal Qualcomm employees; and
4. inadequate follow-up by the outside attorneys

The Qualcomm Court also pointed to a host of failures on the part of Qualcomm's in-house ESI team and outside counsel including:

a.   the failure of the in-house ESI team to meet in person with appropriate key employees at the
      beginning of the case to explain the legal issues and discuss appropriate document collection; and

b.   the failure of that team to determine how Qualcomm's computer system was organized, including:

  i.   where emails are stored
 ii.   how often and to what location laptops and personal computers were backed up
iii.   whether, when and under what circumstances data from laptops was copied into repositories
iv.   what type of information is contained in the various databases and repositories; and
v.    what records were maintained regarding the search for and collection of documents for
       litigation

The Court found that Qualcomm's conduct warranted sanctions and awarded Broadcom all of its litigation costs, fees, and expenses — approximately $8 million dollars.

In Pension Committee, a securities case involving the liquidation of a hedge fund, the Plaintiffs' attorneys issued a "litigation hold letter" (a letter advising the company to protect and preserve all relevant evidence and to suspend any automatic data deletion protocols) that did not direct its employees to preserve and/or collect relevant records. Instead, it placed "total reliance on the employee to search and select what that employee believed to be responsive records without any supervision from counsel." Managers delegated the document preservation and collection efforts to inexperienced subordinates with little or no instruction as to how to adequately carry out these responsibilities. No comprehensive search for documents was conducted, and as discovery proceeded, there were no witnesses who could testify as to "which files were searched, how the search was conducted, who was asked to search, what they were told, and the extent of any supervision." The client was also "never specifically instructed not to destroy records." The Court presumed the relevance of the destroyed records and issued an adverse-inference instruction.

Finally, in Rimkus, a case involving a breach of a non-competition agreement and misappropriation of trade secrets claims, the Court heard allegations regarding the intentional destruction of evidence. The Court ultimately concluded that some defendants intentionally deleted emails after a duty to preserve had clearly arisen and ordered that the jury would be allowed to hear about the destruction of evidence and the concealment/delay tactics, and that the jury would "be instructed that if it decides the defendants intentionally deleted emails to prevent their use in litigation. . . it may infer that the . . . emails would have been adverse to the defendants." In Rimkus, the Defendants were also sanctioned and were forced to reimburse the Plaintiff for the excess discovery costs and delays caused by the deletion and concealment of these emails.

These three cases highlight an increasing judicial frustration with companies' misapprehension of and inattention to their obligations regarding ESI. A few "best-practices" can be gleaned from these decisions. Thus, as soon as litigation can be reasonably anticipated, your company should have a procedure to trigger and proactively manage the document-preservation process through at least the following affirmative steps:

1. Person with authority should issue a clearly written litigation-hold letter on company or legal letterhead (email not sufficient) explaining the potential claims in the case to key personnel to ensure that the routine operation of any document-destruction policy is suspended, that all sources of potentially relevant information, including archival media, is "placed on hold" and safeguarded, and that consequences of noncompliance are clearly understood;
2. Making clearly articulated preservation instructions available to all key personnel;
3. Become educated about the computer and electronic device architecture by speaking with IT personnel, interviewing the expected key players in the litigation, and learning how and where those key players store their ESI including answers to all of the following:

a.    Identity of relevant custodians
b.    Location, type and description of relevant information
c.    Description of IT environment at the relevant time
d.    Discovery timing
e.    Potential claims of privilege
f.     Scope and specificity of discovery requests
g.    Form of production
h.    What information is "accessible" vs. what is "inaccessible"
i.     Likelihood of cost shifting
j.     Clawback of mistakenly produced privileged information
k.    Any inadvertent destruction of relevant information that occurred during the ordinary course of
       business
l.     Preservation requirements
m.   Identification of an ESI liaison

1. Preserve all records of former employees that are in a party's possession, custody or control;
2. Preserving backup tapes when they are the sole source of potentially relevant information;
3. Having outside counsel oversee the collection and preservation of ESI rather than delegating that responsibility to company employees who may not understand or appreciate the critical importance of the task, or at least conduct random searches or audits of the client-identified records;
4. Document efforts taken to identify, locate, preserve and search records containing relevant ESI, and prepare a client representative knowledgeable about these efforts and company systems in the event that discovery on these issues becomes necessary; and
5. Monitoring preservation efforts throughout the pendency of any litigation

The importance of managing your ESI as soon as a dispute can be "reasonably anticipated" cannot be overstated. Further, "reasonably anticipated" does not mean that you can wait to be served with a lawsuit or a litigation hold letter from opposing counsel before you begin to protect your data. You must do so as soon as you become aware of a potential dispute that could ripen into litigation - and your failure to do so can subject you and your company to serious sanctions. Keep in mind the purpose that is animating these seemingly harsh judicial decisions. With nearly 96 percent of all potential evidence now stored in electronic form, the integrity of the judicial process depends on parties' compliance with these rules, as "accidental" destruction of electronically stored evidence can critically prejudice a party's ability to adjudicate a legal claim. Mindful of this, courts are imposing stricter and stricter sanctions for noncompliance, ranging from cost-shifting and fines to special jury instructions, preclusion of claims or defenses, and terminating sanctions such as a default judgment or dismissal. Ending up on the wrong-side of one of these discovery sanctions can make the defense of your case much more difficult - and more about the process of discovery than the merits of the underlying claim.

We recommend two courses of action with respect to ESI-related issues. First, if you are served with a lawsuit, receive a litigation hold letter or threat of litigation, or as soon as you have identified a problematic issue that could even potentially ripen into a litigation, call outside legal counsel for initial guidance on determining your ESI preservation obligations. Second, trigger a litigation hold and follow the steps in your ESI retention/destruction plan.