2009-03-21 Spoliation, More Spoliation, and a Decision Compelling Forensic Imaging

Three decisions this week, including a forensic data collection decision from the Southern District of New York, a , And yes, what how else to welcome Spring but with two spoliation decisions, one in a direct appeal of a Bankruptcy Court judgment from the Northern District of Illinois, and the second a New Hampshire ruling where the Supreme Court of New Hampshire looks to the Federal Rules (and federal district and appellate court decisional authority) for eDiscovery guidance, and discusses spoliation standards for that state.

Decisions:

Grochocinski v. Schlossberg, --- B.R., ----, 2009 WL 635447 (N.D.Ill. 2009)
Anthropologie, Inc. v. Forever 21, Inc., 2009 WL 690239 (S.D.N.Y. 2009
New Hampshire Ball Bearings, Inc. v. Jackson, --- A.2d ----, 2009 WL 691205 (N.H. 2009)

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Case: Grochocinski v. Schlossberg
Citation: ---B.R.---, 2009WL635447
Date: 2009-03-11
Topics: eDiscovery in Bankruptcy (adversary), proceedings, ESI destruction, District Court appellate standards governing ruling of bankruptcy courts (clear error for facts, de novo for legal conclusions), "abuse of discretion" review of discovery sanctions, Seventh Circuit standards for default judgment impositions resulting from discovery order violations.

In this direct appeal from a trial decision in an adversary proceeding from the Bankruptcy Court of the Northern District of Illinois, the District Court affirmed an entry of judgment in favor of the bankruptcy trustee and against a transferee of property from a bankrupt (and a finding that there had been a fraudulent property transfer). While this is not a true "non-party" sanctions proceeding and appeal, it is noteworthy that the defendant was not the bankrupt, but the transferee of the bankrupt.

In this case, counsel for the Trustee sent a letter of preservation to the transferee on December 20, 2007, giving them "notice to retain all electronic discovery related to the Trustee’s adversary proceeding. Apparently, the transferee ("Defendant") must have given the Trustee’s counsel some concern. Here’s what happened next:

March 24, 2008: Trustee files motion to compel defendant to provide access to all computer hard drives which contained data related to the subject transfer ;

April 4, 2008: The Bankruptcy Court granted the Trustee’s motion and enters a protective order related to production of ESI contained in defendant’s computers. That order also provided for the hiring of a "computer forensic services firm" to "mirror the hard drives" on defendant’s computers and to act as custodian "of the data contained therein."

(Blognote: The term should be "image" and not "mirror" – I’ve brought up that distinction in litigation).

You can see where this is headed. On April A mere three days following the issuance of the protective order:

April 7, 2008: The computer expert’s analysis showed that (1) a wiping program called "nCleaner" had been "installed and launched on at least two computer as of April 1, 2008; "(2) (2) over 16,000 files on at least two computers had been destroyed on or around April 1, 2008; (3) overwriting operating systems were installed on two of the computers in January-February 2008; and (4) a program to verify the integrity of the data destruction had been installed on the computers."
The bankruptcy court found that:

"[Defendant] had a duty to preserve electronic files pursuant to the electronic document retention letter, and that the electronic files and data were destroyed in violation of this duty."
Really, is there any need to digest further? Methinks so.

April 9, 2008: The Trustee filed a motion seeking sanctions against defendant "based on the evidence from the computer expert. The bankruptcy court held a hearing, and:

"…found the evidence, which [defendant] had been under a duty to preserve, had been spoiled."

The bankruptcy court then entered an order of sanctions against defendant.

The sanctions order:

"…stipulated that the facts as alleged by the Trustee relating to [defendant] were taken as proof against him,…that [defendant] was prohibited from introducing testimony or other evidence in opposition to those facts," and "…additionally, [defendant] was ordered to pay various costs of Trustee’s counsel and the computer expert."

District Court Review of Bankruptcy Court Judgments

District Judge Castillo then sets the required decisional approach to be used by a District Court, sitting in direct-appeals posture, in connection with an appeal of a bankruptcy court ruling. In short the standards are "clear error" for factual findings, and "de novo" review for legal conclusions:

""The bankruptcy court's factual findings are reviewed for clear error, and its legal conclusions are reviewed de novo. Dollie's Playhouse, Inc. v. Nable Excavating, Inc., 481 F.3d 998, 1000 (7th Cir.2007). "Clear error is an extremely deferential standard of review, and will only be found to exist where the ‘reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ " Pinkston v. Madry, 440 F.3d 879, 888 (7th Cir.2006) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)). Accordingly, this Court may not "reverse the finding of the trier of fact simply because ... [we] would have decided the case differently." Id."

District Judge Castillo then focuses his discussion on the standard for review (clear error) for factual findings underpinning a discovery sanctions ruling:

This Court reviews the imposition of discovery sanctions for abuse of discretion. Maynard v. Nygren, 332 F.3d 462, 467 (7th Cir.2003). Thus, this Court will uphold any exercise of the bankruptcy court's discretion that could be considered reasonable, "even if we might have resolved the question differently." Id. Additionally, the factual findings underlying the bankruptcy court's imposition of sanctions are reviewed for clear error. Negrete v. Nat'l R.R. Passenger Corp., 547 F.3d 721, 724 (7th Cir.2008).

Seventh Circuit "Uphill Battle" Standard for Review of Discovery Sanctions

District Judge Castillo then notes that the "abuse of discretion" standards for appellate review of imposition of discovery sanctions in the Seventh Circuit is well-nigh insurmountable:

"When ordering the sanctions of default judgment or dismissal for discovery violations, the court must find that the party's actions displayed willfulness, bad faith, or fault. Collins v. Illinois, 554 F.3d 693 (7th Cir.2009). Under the abuse of discretion standard, "an appellant faces an uphill battle" in seeking to reverse a lower court's sanction order. In re Golant, 239 F.3d 931, 937 (7th Cir.2001). A court's decision will be upheld so long as it could be considered reasonable. Collins, 554 F.3d at 693."

Seventh Circuit Requirements for Showing of Bad Faith Non Compliance with Court Order Met

The defendant argued that the bankruptcy court’s ruling was "clear error" because the relevant Seventh Circuit standards were not met. The U.S. Court of Appeals for the Seventh Circuit sanctions imposition standard for failure comply with a discovery order pursuant to Fed. R. Civ. P. Rule 37(b)2(B) include a finding of willfulness, bad faith or fault. What’s notable about this language is that the Seventh Circuit’s approach (at least, in the author’s opinion) is one of near-presumptive correctness:

"When ordering the sanctions of default judgment or dismissal for discovery violations, the court must find that the party's actions displayed willfulness, bad faith, or fault. Collins v. Illinois, 554 F.3d 693 (7th Cir.2009). Under the abuse of discretion standard, "an appellant faces an uphill battle" in seeking to reverse a lower court's sanction order. In re Golant, 239 F.3d 931, 937 (7th Cir.2001). A court's decision will be upheld so long as it could be considered reasonable. Collins, 554 F.3d at 693."

Default Judgment Imposition as Sanction for Discovery Order Violation

The Court notes that the Seventh Circuit has "questioned" whether the imposition of a terminating sanction resulting from a discovery violation must be supported by either a "preponderance of" or by "clear and convincing" evidence, but finds that sanctions were properly imposed under either standard:

The Seventh Circuit has recently questioned whether a default judgment from a discovery violation must be supported by "clear and convincing evidence," as opposed to a "preponderance of the evidence" standard. Ridge Chrysler Jeep, LLC v. Daimler Chrysler Fin. Serv. Americas LLC, 516 F.3d 623, 625 (7th Cir.2008)(noting that neither a statute or the Constitution requires an elevated burden for dismissal as a sanction, when the burden in the underlying suit is a preponderance of the evidence); Wade v. Soo Line R.R. Corp., 500 F.3d 559, 564 (7th Cir.2007). The Court finds that under either standard, there is sufficient evidence of [Defendant's] bad faith."

The Court’s reasoning is simple and straightforward: The defendant had a duty to preserve, both before and after the issuance of the Court’s motion to compel, and violated that duty:

"Beginning in December 2007, [Defendant] was under an obligation to retain all electronic discovery related to the Trustee's adversary proceeding."

" On March 24, 2008, the Trustee filed a motion to compel [Defendant] to provide access to all computers that contained data related to the transfers… After reviewing three computers that were utilized by [Defendant], the computer expert concluded:

(1) that a disk cleaning program called "nCleaner" was installed and launched on at least two computers as of April 1, 2008;
(2) over 16,000 files on at least two computers had been destroyed on or around April 1, 2008;
(3) overwriting operating systems were installed on two of the computers in January-February 2008; and (4) a program to verify the integrity of the data destruction had been installed on the computers."

The Court found that at minimum, defendant had acted in bad faith, justifying the imposition of terminating sanctions:

"Even if [Defendant] did not destroy the files himself, the bankruptcy court found that at the very least [Defendant] acted in "reckless disregard" of his discovery obligations. Such disregard is sufficient to establish bad faith. See In re Thomas Consol. Indus. Inc., 456 F.3d 719, 726 (7th Cir.2006)("... blatant disregard of the bankruptcy court's order was more than sufficient to demonstrate the bad faith finding that justified dismissal.")."

The Court’s affirmed the imposition of terminating sanctions (judgment) on the defendant, adding that:

"The sanctions imposed against [Defendant] are not unreasonable in light of the broad discretion afforded to the bankruptcy court in determining sanctions. See Golant, 239 F.3d at 937 (a lower court is not required to select the least severe sanction, as long as the sanction selected is reasonable)."

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Case: Anthropologie, Inc. v. Forever 21, Inc.
Citation: 2009 WL 690239 (S.D.N.Y. 2009)
Date: 2009-03-11
Topics: Incomplete ESI production, summaries of raw data insufficient, forensic data collection ordered.

This copyright infringement action from the Southern District of New York should be classified in either the "what-not-to-do" or the "only in Ne w York" ESI abuse discovery abuse category. Here, not only did the defendant fail to produce ESI as requested, and then ordered to be produced by the Court, it then provided only "summaries" of the requested ESI.

Ok, no crystal ball needed to presume that the requesting party filed a motion to compel, but the U.S. Magistrate Judge Dolinger’s Court’s approach and analysis provides a good approach framework:

"Principally, Anthropologie seeks an order compelling defendants to provide the documents in issue, including all such documents in electronic storage. Plaintiff also asks for an order permitting it to appoint an expert to copy and review the hard drives of the computer system utilized by Forever 21 for its business in order to search for the categories of documents that defendant has contended it does not keep, particularly documentation of its sales of the infringing garments and resulting profits."

The defendant here apparently had played fast and loose, and upon its own whim and caprice, at variously stated that it had no underlying ESI in response to either discovery requests, but that for settlement purposes, it did.

The Court wasn’t buying:

"Instead, Forever 21 has, over an extended period of time, insisted that it did not have such documents or lacked ready access to them, representations that are incredible on their face. Moreover, at the same time-and in plain contradiction of these representations-this defendant offered to provide cumulated data, solely for settlement purposes, that it plainly could only have derived from underlying documentation that defendant was claiming either did not exist or was not accessible."

"…Given the scale of defendants' business, it is virtually inconceivable that it does not keep records-whether hard copies or in electronic storage-reflecting the detailed data involved in purchasing, distributing, and selling each of these garments. Now defendants' own conduct in discovery-including its proffer of summaries of that data-conclusively demonstrates the falsity of its prior representations. Moreover, its effort to shield even its summaries from the discovery process (by designating them as "for settlement purposes only") reflects a refusal to comply with even the minimal requirements of the governing discovery rules."

Raw Data Summaries Held Insufficient Production

The Court, after finding that defendant’s ploys had resulted in serious delay (think impeding the orderly administration of justice), and describing as "frivolous" defendants arguments opposing plaintiff’s sanctions motion, addresses both defendant’s credibility as well as the issue of its insufficient ESI production:

"Delays aside, the proffer by defendants of summaries (even if not limited to settlement purposes) is not a substitute for production of the raw data on which the summaries are based. Plaintiff is not required to take such summaries-apparently prepared exclusively for the litigation-on faith. Moreover, while this proposition is true in all cases, it is especially so here, where the credibility of defendants is in serious question."

The Court noted that the summaries provided by defendant contradictory, but this comment tees up the piece de resistance:

"In addition, as noted, defendants have made a series of manifestly false statements over a period of many months about the non-existence or inaccessibility of essential corporate records involving documentation of purchases, distribution, and sale of the allegedly infringing garments-and this too puts in serious question the trustworthiness of their representations as to the accuracy of their data."

Continuing with my mangling of the French language, the Magistrate Judge Dolinger then delivers the coup-de-grace and orders the production of four categories of information:

"The foregoing makes it manifest that defendants must turn over to plaintiff's counsel forthwith the data and documentation on the basis of which they prepared each of the summaries that they have proffered to plaintiff between last April and the end of December"

"...Furthermore, this production is to include not only hard-copy documents, but any electronically stored data that comes even arguably within the scope of these four categories. To facilitate this requirement, plaintiff is to provide to defendants' counsel within seven days the specifications for formatting any such electronically stored data to facilitate its use by plaintiff. The production is to be made within seven days thereafter."

Request for On-Site Forensic Imaging

Plaintiff further requested that the Court order an on-site forensic imaging of defendant’s hard drives to ascertain whether all of defendant’s responsive records had been produced. The defendant claimed that granting this relief would "take weeks and gravely harm its business." Perhaps not surprisingly, the Court sided with the plaintiff, noting that in certain circumstances (such as where litigant credibility has come into question), this is an appropriate remedy, citing to U.S. District Judge Shira Scheindlin’s recently published Digital Evidence casebook:

"Although such court-ordered on-site inspections are not routinely granted, they may well be justified where there is considerable doubt about the completeness of a litigant's production and the information in question goes to the heart of the claims in the case. See, e.g., Shira A. Scheindlin et al., Electronic Discovery and Digital Evidence: Cases & Materials 271-75 (West 2009) (discussing cases). In this case defendants' performance to date appears to justify the use of such a procedure if it can be performed without undue delay and burden."

Blognote: It is becoming increasingly common for courts to invite (or perhaps remind) prevailing parties in a Fed. R. Civ. P. Rule 37 proceeding to apply for attorneys fees and costs:

"Finally, in view of the delay and expense occasioned by defendants' course of conduct in discovery, plaintiff is authorized to apply, pursuant to Rule 37(a)(4), for an award of the expenses of its motion, including reasonable attorneys' fees."

I suspect that the motivation for this (apart from the clear language of Rule 37)is more warning (to others) than reward.

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Case: New Hampshire Ball Bearings, Inc. v. Jackson
Citation: --- A.2d ----, 2009 WL 691205 (N.H. 2009)
Date: 2009-03-18
Topics: New Hampshire looks to FRCP for eDiscovery guidance, New Hampshire spoliation standards, adopts Second Circuit’s Residential Funding approach; forensic images and failure to employ write blockers.

This case involved an action against a former employee of plaintiff, alleging breach of confidentiality and misappropriation of trade secrets. A jury found the defendant had not misappropriated trade secrets, but had breached his confidentiality agreement. The decision from Supreme Court of New Hampshire affirms the trial court’s rulings concerning discovery motions, evidentiary rulings jury instructions and post-trial motions, almost all of which focus on the duty to preserve ESI, failure thereof, and the type of inference instruction permitted by the court.

Taking things from back to front, let’s look at what the plaintiff sought by way of jury instructions:
"At the beginning of this case, I issued an Order requiring the defendants to preserve relevant evidence. The evidence presented demonstrates that defendants Sargent and Jackson failed to comply with my Order. Therefore, if you find that a reasonable person in the position of Sargent and/or Jackson would have preserved the evidence, you may assume that the evidence that was not preserved would have helped the plaintiff, and you may decide the case as if the evidence was helpful to the plaintiff and presented by the plaintiff during the trial."

The Court rejected plaintiff’s proposed instructions and crafted its own:

"I instruct you that all parties are under an obligation to preserve documents and records from the time that the party is reasonably on notice that a document or record may become evidence or be subject to discovery in a lawsuit. In this case, the Plaintiff maintains that the Defendants intentionally lost or destroyed certain records or documents subject to a preservation obligation. The Defendants deny this and to the extent that documents or records are missing, they suggest innocent explanations. Also, the Defendants, in turn, maintain that the Plaintiff destroyed certain records subject to a preservation obligation, a claim that the Plaintiff has denied. If, based on the evidence, you find that records or documents would have been relevant to this case and that a party intentionally lost or destroyed them to keep the information secret, you may draw an unfavorable inference on account of there having been missing documents or records. If you find, however, that there was an innocent explanation for the missing records or documents, or if you find that those records and documents would not have been relevant to this case, you may not draw such an inference."

Both sets of instructions appear to permit the jury to draw an inference, but the court-crafted instructions also appear to include a pre-condition to that permission, and that is that there must not have been an "innocent explanation" and that the documents would have been relevant. The Court’s instruction set also reminds the jury that, without satisfaction of those preconditions, it (the jury) was not prohibited from drawing that inference.

This case makes for interesting reading, as a forensics examination of the relevant storage devices (including cameras, flash drives, and laptop hard drives) showed evidence of deletions, overwriting of data, disk wiping, disk reformatting, and outright flash drive destruction that occurred after the defendant’s duty to preserve had been triggered. Oh, and there was some evidence that an internet search had been made seeking information on the erasing of computer hard drives. (As Mr. Gleason used to say, a "mere bag of shells").

The trial court was not amused by the evidence of defendant’s actions, considered them to be indirect criminal acts, and referred the defendant to the New Hampshire Attorney General (who after review, declined to prosecute). One wonders why plaintiff had not chosen to commence aComputer Fraud and Abuse Act action.

New Hampshire State eDiscovery Proceedings Guided by Federal Rules of Civil Procedure

I think this one of the first decisions in which a highest state court (District of Columbia excepted because it is not a state) expressly announcing that it will take guidance from the Federal Rules of Civil Procedure for eDiscovery:

"Because electronic discovery has been more predominant in federal courts, we look to those courts for guidance."

The Supreme Court of New Hampshire follows with a succinct multi-district (and Circuit) court decisional analysis:

"We begin by recognizing that electronic data, including forensic imaging of hard drives, is within the scope of discoverable material. See In re Pharmatrak, Inc., 329 F.3d 9, 17 (1st Cir.2003); Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D.Minn.2002). Because electronic discovery can easily become broad and intrusive, "[c]ourts have been cautious in requiring the mirror imaging of computers where the request is extremely broad in nature and the connection between the computers and the claims in the lawsuit are unduly vague or unsubstantiated in nature." Balboa Threadworks, Inc. v. Stucky, No. 05-1157-JTM-DWB, 2006 WL 763668, at *3 (D.Kan. Mar. 24, 2006). Without a sufficient showing of relevance and need, courts disallow the "drastic discovery measure" of permitting a party to image all of an opponent's electronic media. McCurdy Group v. American Biomedical Group, Inc., 9 Fed. Appx. 822, 831 (10th Cir.2001). Courts are more receptive, however, to circumscribed requests limited to specified individuals or computers expected to produce relevant information. See Rowe Entertainment v. William Morris Agency, 205 F.R.D. 421, 427-28, 432-33 (S.D.N.Y.2002) (granting revised and limited request for defendants' backup tapes and emails and prescribing protocols for imaging); Simon Property Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 641 (S.D.Ind.2000) (granting access to computers used by four named individuals); Playboy Enterprises, Inc. v. Welles, 60 F.Supp.2d 1050, 1053 (S.D.Cal.1999) (granting access to defendant's personal computer). We find the limitations imposed in federal courts to be both sensible and persuasive."

Adverse Inferences and New Hampshire Reliance on Second Circuit Spoliation Analysis

The Supreme Court of New Hampshire notes that the Second Circuit approach to spoliation set forth in Residential Funding v DeGeorge accords with New Hampshire decisional authority:
"As one court held, however, the trial court may grant a party's request for an adverse inference instruction if the evidence establishes: "(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense." Residential Funding Corp. v. DeGeorge Financial, 306 F.3d 99, 107 (2d Cir.2002) (quotations omitted). This standard accords with our own case law. See Murray, 149 N.H. at 271; see also Super. Ct. R. 35 g(2)(b) (court can designate certain facts be taken as established to sanction discovery abuse)."

That said, in New Hampshire, where testimony conflicts, or where credibility is brought into the mix, spoliation is for the jury to decide:

"If, however, there remains a question of fact as to any of the three factors, spoliation is a matter for the jury, not the judge. See Murray, 149 N.H. at 271 (affirming jury instruction substantially the same as the instruction given here); Rodriguez v. Webb, 141 N.H. 177, 179 (1996)."

"Because there were conflicting explanations concerning the defendants' state of mind and the relevance of missing evidence, the trial court properly allowed the jury to determine the weight and credibility to be given the testimony. See Transmedia Restaurant Co. v. Devereaux, 149 N.H. 454, 461 (2003) (stating weight and credibility of testimony is within the jury's province)."

"…Although the trial court gave more credit to NHBB's allegations of spoliation, it acknowledged that the jury was free to find differently and submitted the case to the jury. That decision was not erroneous. After the jury apparently credited the defendants, it was not an unsustainable exercise of discretion for the trial court to uphold the verdict in light of conflicting testimony."

Blognote: I expect that there a growing need for both federal and state uniformity in eDiscovery (and ultimately, digital evidentiary matters). Whether that need is addressed in the near future is anyone’s guess.

SWT