Wednesday, May 06, 2009

2009-05-06 Spoliation, Discovery Abuse, Work-Product Privilege - And ESI

Seven decisions this week.

  • Spoliation - A non-ESI but nevertheless instructive spoliation decision from the Southern District of New York. The Court found no spoliation, but I still wonder how in 2008 Board of Director’s notes are recorded by hand, and then “converted” into typewritten documents. By no less than a special committee of the Board of Directors of a high technology company. In 2008. Most peculiar. I’ll have to transcribe that from my Dictaphone.
  • An Independent Tort of Negligent Spoliation­ of Evidence in Pennsylvania? - We’ll know soon.
  • Discovery Sanctions Reversal – In a decision from the U.S. Court of Appeals for the Second Circuit, the Court discusses the standards for imposition of sanctions on counsel under the “inherent powers” theory, reaffirming the Second Circuit standard that findings of “bad faith” are “personal.”
  • Unintended Metadata Alteration - Results in a finding of no bad faith, and no spoliaiton. From the U.S. District Court for the Southern District of Florida.
  • Initial Disclosures and ESI, Meet and Confer - The U.S. District Court for the District of Kansas provides us with a decision in which the Court reminds us that meet and confer obligations are not to be taken lightly by either parties or their counsel.
  • Judicial Review of Arbitration Decision Concerning Spoliation – Think really, really, high bar.
  • Work Product Privilege and Preservation Obligation Trigger, ESI Discovery Abuse, Procedural Gamesmanship, Effect of Filing of Appeal While Motions to Preserve, Sanctions for Spoliation Pending – From the U.S. District Court for the Western District of Pennsylvania. View sausage being made. Not a pretty sight.



In re Take-Two Interactive Software, Inc. Derivative Litigation, 2009 WL 1006251 (S.D.N.Y. 2009)
Pyeritz v. Com., ---A. 2d---, 20009 WL 1099693 (Pa. 2009)
Continental Group, Inc. v. KW Property Management, LLC, 2009 WL 1098461 (S.D. FL 2009
Wolters Kluwer Financial Services, Inc. v. Scivantage, 2009 WL 1048990 (2d Cir. 2009)
Patterson v. Goodyear Tire and Rubber Company, 2009 WL 1107740 (D. Kan. 2009)
Jones v. PPG Industries, Inc., 2009 WL 1119595 (W. D. Pa. 2009)
Hohider v. United Parcel Service, Inc., --- F.R.D. ----, 2009 WL 1163931 (W.D. Pa. 2009)

Case: In re Take-Two Interactive Software, Inc. Derivative Litigation
Citation: 2009 WL 1066251 (S.D.N.Y. 2009)
Date: 2009-04-21
Topics: Destruction of handwritten director’s meeting notes after being typewritten held not spoliation, testimony that typewritten version was reviewed by author supported finding of no bad faith destruction

This decision from the U.S. District Court for the Southern District of New York is both peculiar as well as instructive. The case involved one of the many shareholder suits against companies that engaged in the practice of options backdating.

First, the instructive portion of the decision. A subcommittee of defendant’s Board of Directors called the “Special Litigation Committee” (SLC) was formed to investigate. It was the custom and practice of the secretary at SLC meetings to take notes. It was undisputed that these notes were always handwritten, and then destroyed after they were converted to typewritten form and reviewed by the SLC chair.

Plaintiffs alleged spoliation of the original handwritten notes of the SLC meeting (as well as the handwritten notes of a draft supplemental report) and requested that the typewritten reports be excluded from evidence. U.S. District Judge Swain denied the motion.

The Court first begins with the Second Circuit’s approach to spoliation, and discerns between the imposition of sanctions under Fed. R. Civ. P. Rule 37 (violation of discovery order necessary for imposition of sanctions under this rule) and the Court’s “inherent powers” to sanction:

“Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation. It has long been the rule that spoliators should not benefit from their wrongdoing ....“ West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir.1999) (citations omitted). “Even without a discovery order, a district court may impose sanctions for spoilation [sic], exercising its inherent power to control litigation.” Id. (citations omitted).FN1

FN1. Plaintiffs also invoke Rule 37(b)(2)(A) of the Federal Rules of Civil Procedure, but that provision appears to be inapposite because the documents at issue were destroyed before any court order was entered in this case concerning discovery, and Plaintiffs do not point to any order that they allege was violated. See Fed.R.Civ.P. 37(b)(2)(A) (“If a party ... fails to obey an order to provide or permit discovery, ....”). In re Take-Two Interactive Software, Inc. Derivative Litigation, 2009 WL 1066251, 4 (S.D.N.Y. 2009)

The Court then notes that it has “broad discretion” in connection with spoliation sanctions imposition:

“A district court has broad discretion in crafting a proper sanction for spoilation [sic][, but] the applicable sanction should be ... designed to: (1) deter parties from engaging in spoilation [sic]; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party.
Id. (citations omitted). Dismissal of a lawsuit is appropriate “if there is a showing of willfulness, bad faith, or fault on the part of the sanctioned party.... [D]ismissal should be imposed only in extreme circumstances, usually after consideration of alternative, less drastic sanctions.” Id. (citations omitted).” Id., at *4.

Interestingly enough (but not peculiar; that comes later) the Court sua sponte then also considers whether the more severe evidential sanction of an adverse inference should be drawn:

“The Court has also considered whether a sanction in the form of an adverse inference should be drawn within the context of the SLC's motion. “A party that seeks an adverse inference instruction for destruction or late production of evidence must show that: (i) the party having control over the evidence had an obligation to preserve or timely produce it; (ii) the party that destroyed or failed to timely produce evidence had a culpable state of mind; and (iii) the missing or tardily produced evidence is 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.” In re NTL, Inc. Secs. Litig., 244 F.R.D. 179, 192 (S.D.N.Y.2007) (citations omitted). With respect to the third factor, the party seeking an inference in his favor must produce “some evidence suggesting that a document or documents relevant to substantiating his claim would have been included among the destroyed files.” Kronisch v. United States, 150 F.3d 112, 128 (2d Cir.1998).” Id.

Extrinsic Evidence Must be Offered to Show Destroyed Evidence Was Unfavorable to Alleged Spoliator

The Court makes short shrift of plaintiff’s assertion that defendant had a duty to preserve the handwritten minutes or supplemental report, and points out that even if defendant had an “obligation not to destroy the documents at issue in light of reasonably foreseeable litigation,” plaintiffs offered no proof of prejudice in connection with the destruction of either handwritten document. First, it was significant that it was the custom and practice for handwritten notes to be destroyed after they were typewritten, and that the SLC chairman reviewed the typewritten notes for accuracy. It appears that there was simply no evidence offered that either the handwritten notes or reports (later converted into typewritten documents) might have contained any unfavorable or negative information:

“The parties do not dispute that Brown ordered his secretary to destroy her handwritten notes of SLC meetings as well as his handwritten draft of the SLC Supplemental Report. However, even if Brown had an obligation not to destroy the documents at issue in light of reasonably foreseeable litigation, Plaintiffs proffer no evidence whatsoever suggesting that the destroyed documents contained anything that would have reflected unfavorably on the SLC's independence, good faith or reasonableness. See Kronisch, 150 F.3d at 127 (“no adverse inference where party failed to provide any extrinsic evidence that the subject matter of the lost or destroyed materials would have been unfavorable to the opposing party or would have been relevant to the issues in this lawsuit”) (citation and quotation omitted). Plaintiffs do not dispute Brown's testimony that his secretary converted her handwritten notes of SLC meetings into typewritten draft minutes before destroying the handwritten notes ( see Brown Dep. at 71:23-25)
FN2 and that this was a regular practice. (See Brown Dep. at 71:24-25.)”

“There is no allegation that the typewritten minutes were also destroyed, and Plaintiffs do not dispute Brown's testimony that he primarily reviewed her typewritten drafts since it was difficult to read her handwritten notes. ( See Brown 71:2-5.) There is no indication anywhere else in the record that a reasonable trier of fact, considering all of the evidence, would suspect that such handwritten notes contained information undermining the fact or appearance of the SLC's independence, good faith or reasonableness.” Id. at *5

“Similarly, there is no suggestion that Brown's handwritten draft of the SLC Supplemental Report contained some form of incriminating information. Plaintiffs do not dispute Brown's testimony that it was also his regular practice to destroy his handwritten drafts, and Plaintiffs proffer nothing that would suggest that the practice of destroying handwritten drafts was such an unusual practice that a reasonable fact-finder would conclude there was something to hide, especially when there are no indicia in the record suggesting an unreasonable investigation or bad faith.” Id.

Party’s Conduct Provided No Inference of Relevance

Plaintiffs argued in the alternative that relevance (and prejudice) could be established by defendant’s conduct, and that the destruction of the handwritten notes amounted to bad faith of gross negligence. Second Circuit authority holds that bad faith or grossly negligent acts of a party can circumstantial evidence that destroyed evidence was unfavorable to the non-spoliating party.

Not in this instance, said the Court (and check out footnote 3):

“Plaintiffs' assertions concerning the prejudicial impact of the destroyed documents are premised entirely on speculation. Under the circumstances, no adverse inference is warranted. See Kronisch, 150 F.3d at 128 (the party seeking an inference in his favor must produce “some evidence suggesting that a document or documents relevant to substantiating his claim would have been included among the destroyed files.”).

“FN3. Plaintiffs argue that “relevance” in this context may be inferred where a party's conduct amounts to bad faith or gross negligence. See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 109 (2d Cir.2002) (“bad faith alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party”); id. (“a showing of gross negligence in the destruction or untimely production of evidence will in some circumstances suffice, standing alone, to support a finding that the evidence was unfavorable to the grossly negligent party”). However, Plaintiffs have failed to proffer any evidence that Brown's actions were in bad faith or grossly negligent. See generally Kaplan, 484 A.2d at 517 (“As to the destruction by Brown, Wood of the original, handwritten interview notes of its attorneys in favor of a prepared summary of each interview, the [SLC] points out that such a procedure is routinely engaged in by law enforcement agencies and has been approved by the courts, an argument which plaintiff does not dispute.”) (citation omitted).”

Result: Motion to strike denied.

Observed Peculiarity: The allegedly spoliating events occurred in 2007. Handwritten notes? Typewriters? Huh? (Hint: this is one of the options grant backdating securities cases). Why would anyone be using a typewriter in 2008? (Some reasons do come to mind). One might have considered additional depositions, including that of the individual who "typed" the minutes, as well as in house counsel...and perhaps a records management supervisor.

Case: Pyeritz v Com.
Citation: ---A. 2d---, 20009 WL 1099693 (Pa. 2009)
Date: 2009-04-24
Topics: The Supreme Court of Pennsylvania will decide whether Pennsylvania recognizes independent tort of negligent spoliation of evidence

In granting a “Petition for Allowance of Appeal” the Supreme Court of Pennsylvania will determine:

“Whether Pennsylvania recognizes, and if so whether Petitioners have alleged, a cause of action for negligent spoliation of evidence?”

Case: Continental Group, Inc. v. KW Property Management, LLC
Citation: 2009 WL 1098461 (S.D. FL 2009)
Date: 2009-04-22
Topics: Lack of knowledge of altered metadata means no bad faith disclosure, meet and confer, cost shifting

In this decision from the U.S. District Court for the Southern District of Florida, plaintiff moved for an “[A]dverse Inference or Injunction due to Spoliation.” The parties hereto are competitors in the condominium management business in Florida. Plaintiff alleged together with the usual state law tortious interference type actions, violations of the Computer Fraud and Abuse Act (18 U.S.C. 1030 et seq.) in that its former employee, who subsequently was employed by defendant, had downloaded proprietary ESI from its computers prior to her departure from plaintiff’s employ.

Plaintiff’s forensic expert testified that plaintiff’s former employee had downloaded “voluminous electronic files” from plaintiff’s computer system, evidenced apparently from a metadata examination of plaintiff’s computers.
District Judge Cohn then provides a definition of metadata that, while not perhaps as precise as might be preferred, was (imo) sufficiently accurate:

“Metadata” is data regarding the properties of a document, including when it was created, last modified, deleted, etc.” Continental Group, Inc. v. KW Property Management, LLC, 2009 WL 1098461 (S.D. Fl. 2009) at 2.

The What-Not-To-Do Bucket List

The Court determined that there was credible evidence of defendant’s actions sufficient to set them out with no small amount of particularity. A sampling of what was done:

(1) “…[D]efendant’s former employee “copied sand removed voluminous electronic files from plaintiff’s computer…
(2) Relevant files on defendant’s flash drive were “accessed…after [defendant] had been served with the lawsuit”

But, the Court acknowledged, defendant’s former employee testified that she only wanted to know what she was turning over, and further “disclaimed any knowledge of her actions changing the “metadata” of these files.” Continental Group, Inc. v. KW Property Management, LLC, 2009 WL 1098461, at *3 (S.D. Fla. 2009)

Off-topic note: After an interesting discourse on Computer Fraud and Abuse Act jurisdictional sufficiency (and a even more interestingly worded statement by the Court that despite a “slight lean” of decisional authority in plaintiff’s direction, the Court decided to tilt the other way on the statutory interpretation of “loss” and “interruption of service.”

Plaintiff’s Motion for Adverse Inference Based on Destruction of Metadata

Plaintiff’s sought an adverse inference instruction arising from defendant’s destruction of metadata associated with electronic files that were admittedly relevant to the instant lawsuit.

“Plaintiff asserts it is entitled to this adverse inference because Kravit last accessed these files after being placed on notice of this litigation and because she intentionally destroyed metadata evidence relating to her use of the files after being put on notice that these files were relevant and highly material to TCG's claims in this case.” 2009 WL 1098461, at*13

Here, the Court finds that defendant showed no bad faith, which in the Eleventh Circuit, is a requirement for a finding of spoliation and the imposition of an adverse inference sanction. The reason? Defendant’s testimony regarding her lack of knowledge about computers was sufficiently credible to refute plaintiff’s claim of bad faith:

“This Court concludes that Plaintiff has not met its burden of showing bad faith to support the extraordinary remedy of an adverse inference. Penalty Kick Management, Ltd. v. Coca Cola Co., 318 F.3d 1284, 1294 (11th Cir.2003). Although not all of Defendant Kravit's testimony is fully credible, her testimony regarding her lack of knowledge that accessing files would destroy metadata embedded within documents on her portable devices is credible. Such metadata evidence is not obvious to non-computer professionals. Although this lawsuit had just been filed a few days before her access on February 14, 2009, and her counsel should have been on notice to preserve all evidence, including electronic evidence, Defendant Kravit's actions at that time do not rise to the level required for a finding of spoliation of evidence.

“Therefore, Plaintiff's motion for adverse inference is denied.” Id., at 13

Takeaway: Future decisions may find a court rethinking assertions that people just aren’t that technologically sophisticated. One wonders, also, how this might be presented to a jury during trial. T

Case: Wolters Kluwer Financial Services, Inc. v. Scivantage
Citation: 2009 WL 1048990 (2d Cir. 2009)
Date: 2009-04-21
Topics: Second Circuit approach to court’s inherent powers to sanction counsel for misconduct in connection with pleadings and discovery, sanctions under inherent powers requires specific finding of attorney bad faith, bad faith is personal

Let’s start out with the Court’s holding:

“(1) sanctions against law firm were unjustified;
(2) sanctions against junior partner were unjustified; and
(3) sanctions against partner in charge were justified.

Wolters Kluwer Financial Services, Inc. v. Scivantage 2009 WL 1048990 (2d Cir. 2009).

First, the Court reminds us that in the Second Circuit, a district court’s sanctions finding is reviewed on an abuse of discretion standard, and that an abuse of discretion might arise from an “erroneous view of the law” or a “clearly erroneous assessment of facts.” The “assessment of evidence” standard as described below appears a bit tautological:

“We review a district court's imposition of sanctions for abuse of discretion. Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 333 (2d Cir.1999). The reviewing court must ensure that the district court's sanctions are not based on “an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Id. (internal quotation marks omitted). An assessment of the evidence is clearly erroneous where the reviewing court “is left with the definite and firm conviction that a mistake has been committed.” Zervos v. Verizon New York, Inc., 252 F.3d 163, 168 (2d Cir.2001) (internal quotation marks omitted). And the imposition of sanctions is also improper where “it cannot be located within the range of permissible decisions.” Id. at 169. ” Wolters Kluwer Financial Services, Inc. v. Scivantage, Id. at 2

Ok, appellate decisions will frequently include some type of “All that said” tee up to a reversal, and this is decision is no exception. The standard is higher for review where the district court (rather, than say, adversary counsel?) is the “accuser, fact finder and sentencing judge” And so, we see where the Court is heading:

“These familiar principles notwithstanding, we bear in mind that when the district court is “accuser, fact finder and sentencing judge” all in one, Schlaifer, 194 F.3d at 334 (internal quotation marks omitted), our review is “more exacting than under the ordinary abuse-of-discretion standard,” Perez v. Danbury Hosp. ., 347 F.3d 419, 423 (2d Cir.2003).” Id.
Inherent Powers Sanctions Require Specific Finding of Attorney Bad Faith

First and foremost, the Court notes, a Court imposing sanctions on an attorney under its inherent powers must make a specific finding that the attorney acted in bad faith, and specific:

“Imposition of sanctions under a court's inherent powers requires a specific finding that an attorney acted in bad faith. Schlaifer, 194 F.3d at 338… A finding of bad faith, and a finding that conduct is without color or for an improper purpose, must be supported by a high degree of specificity in the factual findings. Id.; Eisemann v. Greene, 204 F.3d 393, 396 (2d Cir.2000) (per curiam)” Id.

The Court recites a two-factor test for determining bad faith:

“Moreover, inherent-power sanctions are appropriate only if there is clear evidence that the conduct at issue is (1) entirely without color and (2) motivated by improper purposes…Conduct is entirely without color when it lacks any legal or factual basis; it is colorable when it has some legal and factual support, considered in light of the reasonable beliefs of the attorney whose conduct is at issue.” Id.Here the district court imposed non-monetary sanctions for both discovery and pleadings misconduct, but the appeals court determined that “both sanctions must be overturned.”

Bad Faith is Personal

The Court notes that the district court found that the attorney in question had engaged in “judge shopping” (a pleadings violation) and sanctioned the firm for its “’inability … to adequately supervise its attorneys,’” and imputed such bad faith behavior to the attorney’s firm for failing “to prevent what she did.” The Court rejected the district court’s findings, reasoning that a finding of bad faith is “personal,” and that without some specific evidence, a bad faith finding would not be imputed to the attorney’s firm:

But we have held that “[b]ad faith is personal” and “may not automatically be visited” on others. Browning Debenture Holders' Comm. v. DASA Corp., 560 F.2d 1078, 1089 (2d Cir.1977). Accordingly, absent other specific evidence of Dorsey's bad faith, a sanction under the court's inherent power is unjustified. See Milltex Indus. Corp. v. Jacquard Lace Co., 55 F.3d 34, 38 (2d Cir.1995) (“[T]he court's factual findings of bad faith must be characterized by a high degree of specificity.”) (internal quotation marks omitted).” Id., at 3.The Court of Appeals also finds that a second sanctions imposition (cancelling a deposition for purposes of concealment) was directed at the wrong attorney, and repeats its rationale for reversal by noting that, absent a specific finding of bad faith personal to attorney “A,” that attorney could not be imputed with attorney “B’s” bad faith even if they were affiliated with the same firm:

“It was in everyone's interest that the deposition be cancelled, for a reason that Reiner lacked authority (from Peters) to disclose. The district court's findings clearly show that the cancellation of the deposition was done for the purpose of concealment, but that was the intent of Peters, not Reiner. In the absence of other specific evidence of Reiner's intentional misconduct, the sanction must be reversed. See Schlaifer, 194 F.3d at 338.” Id., at 5Result: The Court reversed the District Court’s judgment imposing sanctions against both firm and one firm attorney because no bad faith “personal” to either firm or that attorney was established, and affirmed the imposition of sanctions against the attorney in connection with whose behavior bad faith was established.

Case: Patterson v Goodyear Tire and Rubber Company
Citation: 2009 WL 1107740 (D. Kan. 2009)
Date: 2009-04-23
Topics: Initial ESI disclosure, Kansas federal district court meet and confer ESI requirements, counsel requirement to be familiar with client information management system, cost shifting, work product privilege limitations

In this decision from the U.S. District Court for the District of Kansas, U.S. Magistrate Judge Bostwick provides ample reminders that counsel familiarize themselves with both local court rules addressing ESI discovery as well as with their client’s information infrastructure.

In this decision, the Court chides both parties:

“The Court is concerned with the timing of the parties' discussion of these issues. The Initial Order Regarding Planning and Scheduling was entered in this case on May 13, 2008.” Patterson v. Goodyear Tire and Rubber Co., 2009 WL 1107740, at 5 (D. Kan. 2009).

It is never a good sign when a judge refers to a (standing or scheduling) order, and local ESI discovery guidelines, both of which addressed counsel’s compliance with procedural rules that became effective more than two years earlier. What counsel for both parties should have undertaken:

“That Order specifically stated that counsel for the parties:

should keep in mind that electronically stored information (ESI) was the subject of very significant amendments to Fed.R.Civ.P. 16, 26, 33, 34, 37, and 45 that went into effect on December 1, 2006. Therefore, prior to the Rule 26(f) planning conference, counsel should familiarize themselves with those amendments and review the ESI guidelines that are posted on this court's Internet website...

“As this court's ESI guidelines make clear, prior to the Rule 26(f) conference, counsel also should become knowledgeable about their clients' information management systems and their operation, including how the information is stored and retrieved.

“Included in this District's ESI guidelines is a duty on a producing party to include ESI with its Rule 26(a)(1) initial disclosures. Guidelines for Discovery of Electronically Stored Information (ESI), at ¶ 2, http:// This requires a party and its counsel to review the party's ESI files, including current, back-up, archival, and legacy computer files. Concurrently, the guidelines place a duty to notify on the requesting party, which requires a party seeking discovery of ESI to “notify the opposing party of that fact immediately, and, if known at the time of the Fed.R.Civ.P. 26(f) conference, [to] identify as clearly as possible the categories of information that may be sought.” Id., at ¶ 3. The parties are also urged to reach an agreement regarding the scope of e-mail discovery, back-up materials, and how to access costs incurred as a result of electronic discovery. Id., at ¶ 4.” 2009 WL 1107740 at 5.

This, counsel for the parties did not do. Bad juju.

“Based on the arguments made at the March 25, 2009, hearing, as well as those contained in the parties’ briefs, it is clear to the Court that the steps required by the ESI Guidelines did not occur.”

“…Further, the Initial Scheduling Order entered in this case on July 14, 2008, omitted the standard discovery subparagraph (e) regarding ESI. (Compare Doc. 9, at 4-5 with http://, at 5.) While this case was transferred to the undersigned Magistrate Judge after entry of the Scheduling Order, it appears to the Court that both parties neglected the issue of ESI from the outset of this litigation until Plaintiff served the Requests for Production at issue on August 7, 2008 (Doc. 87-2)-a mere three and a half months before discovery in this case was initially to have been completed ( see Doc. 9, at 4.)” Id., at *6

The Court’s reaction should not be surprising, but should serve as a judicial neon sign shouting: we’re-running-out-of-patience-here:

“This is unacceptable.”

Although the court was reluctant to intervene “at this late date,” it did provide some limited relief by permitting additional eDiscovery by way of backup tape restoration and search to be undertaken.

Specific versus General Work-Product

The Court also reminds us that for the attorney client or work-product privilege to apply, the assertion (and documents) must involve advice pertinent to a particular event, or employee, and not general in nature:

“To the extent the document involves specific legal advice regarding a situation with a particular employee, the document could be considered privileged. However, it appears that the subject document was merely drafted for general, instructional and/or educational purposes. Defendant has not met its burden of establishing all of the required elements that would entitle the subject document to either an attorney-client privilege or to work product protection, therefore Defendant is ordered to produce the same.” Id Patterson v. Goodyear Tire and Rubber Co. 2009 WL 1107740, 5 (D.Kan. 2009)

Case: Jones v. PPG Industries, Inc.
Citation: 2009 WL 1119595 (W.D.Pa. 2009)
Date: 2009-04-27
Topics: Third Circuit standard for vacatur of arbitrator’s decision, district court’s review of arbitrator’s spoliation decision

This decision, involving the imposition of spoliation sanctions in an arbitral forum, stands as a stark reminder that “what happens in arbitration, stays in arbitration.” Put another way, the grounds for reversing an arbitral decision, even one involving discovery abuse sanctions imposition, is subject to only limited judicial review. Most courts agree with the following analysis:

“The motion to vacate was governed by Section 10 of the Federal Arbitration Act (“FAA”), which provides that the district court may only vacate an arbitrator's award:

(1) where [it] was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators ...; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made… O'Leary v. Salomon Smith Barney, Inc., 2008 WL 5136950 (D.N.J.2008) (quoting 9 U.S.C. § 10(b)). ” Jones v. PPG Industries, Inc., 2009 WL 1119595, at 1 -2 (W.D. Pa. 2009)

The Third Circuit has also recognized “manifest disregard of the law” as an additional ground for the vacatur of an arbitral award, which the Supreme Court recently ruled not to be an additional, but a shorthand version of existing statutory grounds (arbitration fans probably already know this...but footnote one was nonetheless interesting enough to include here:

“The United States Court of Appeals for the Third Circuit has recognized an additional, judicially created ground for vacatur, which is an arbitration award that is in manifest disregard for the law. Roadway Sys. v. Kayser, 257 F.3d 287, 291 n. 1 (3d Cir.2001). FN1

“FN1. The United States Supreme Court's recent decision in Hall Street Assoc. v. Mattel, Inc., 1 --- U.S. ----, 127 S.Ct. 1396, 1404 (2008), indicates that the section 10 statutory grounds for vacatur are exclusive, and that “manifest disregard” is not a separate grounds for vacatur, but rather, is merely a shorthand description of subsections 1-4 of Section 10(b). “ Id., at *2

No matter, the Court reasoned, as the plaintiff’s assertions of error “did not come close” to meeting either the statutory grounds or the judicially created manifest error standard for the vacatur of an arbitral award.

Takeaway: It might be advisable in contract negotiations to insert language requiring the adoption of the Federal Rules of Civil Procedure, the Federal Rules of Evidence, and the requirement that an arbitrator or panel provide written findings of fact and conclusions of law. Note, however, that while this may help support either an assertion of or defense to spoliation of evidence, there are at least two considerations to keep in mind. The first show stopper, insofar as ESI spoliation might be an issue, is that arbitration panels may not be technologically sophisticated. The second show stopper is the really, really high bar for vacatur. So, choose your arbtitral forum (and your arbitrators) wisely, and, where a dispute might involve ESI (lol), include an option to retain a special master to assist the arbitrators in the event of an ESI discovery or evidence management dispute.

Case: Hohider v. United Parcel Service, Inc.
Citation: --- F.R.D. ----, 2009 WL 1163931 (W.D. Pa. 2009)
Date: 2009-04-28
Topics: Assertion of work product privilege may operate to trigger duty to preserve ESI, misrepresentations concerning preservation efforts and duty of candor to the court, interposition of appeal (and stay of proceedings) after class certification and after filing of motion for preservation order, effect of appellate stay of proceedings on pre-stay motions to preserve evidence and for sanctions.

This class action case from the U.S. District Court for the Western District of Pennsylvania presents issues of procedural gamesmanship, ethics (candor to the tribunal) and a discussion of work product privilege.

One question that has remained largely unaddressed is how the assertion of the attorney work-product privilege operates as a trigger for a duty to preserve. Note that the assertion is always made in anticipation of litigation, and so (think Zubulake IV) it may be argued that the preparation, or creation date of the document in connection with which the privilege is asserted may also operate to trigger an earlier-than-expected (by the producing party) obligation to preserve ESI.

The procedural posture itself is interesting. Here’s the time line:

July 16, 2007 - U.S. District Judge Conti certified a class of plaintiffs, and defendants appealed.
Prior to Appellate Stay- Plaintiffs filed motion for Preservation Order, and Motion for Sanctions based alleging defendant “failed to preserve certain e-Discovery materials for this litigation...”
December 19, 2007 - Court appointed a special master in connection with both motions.
February 8, 2008 - The U.S. Court of Appeals for the Third Circuit stayed district court proceedings.
July 31, 2008 – The District Court ruled that the stay did not extend to either the motion to preserve evidence, or to the motion for sanctions for failure to preserve evidence
December 23, 2008 - “The motion for preservation order was resolved by the parties through a consent order in which the parties agreed to the efforts which should be taken in the future to preserve potential relevant electronic evidence.”

Special Master Activities

After August, 2008 – The court received regular updates from the special master about the nature, scope and expense of his duties, in connection with which no objections were received by either party. The special master then issued two reports.
February 8, 2009 - First Special Master’s Report and Recommendation: “The first report, dated February 18, 2009, addressed the trigger of the duty to preserve and the scope of relevant evidence. (Special Master Report and Recommendation No. 1, Preliminary Determination of Relevant Evidence (Docket No. 309).)” Hohider v. United Parcel Service, Inc. 2009 WL 1163931, 1 (W.D. Pa. 2009)
February 25, 2009 – Second Special Master’s Report and Recommendation: “The second report, dated February 25, 2009, addressed most of the privilege issues associated with defendant's litigation hold efforts. (Special Master Report and Recommendation No. 2, First Disposition of the Parties' Assertions of Privilege and Protection (Doc. No. 310).) 2009 WL 1163931, at 1

Here’s where it gets interesting…

“The special master also “sought and received approval to file a replacement to Report and Recommendation No. 2 (the “replacement report”) so that all the parties' arguments and evidence relating to the privileges asserted for litigation hold materials could be addressed in a single report. (Order Granting Special Master Request for Modification of Schedule (Doc. No. 315).)”

So, what flamed the Court’s ire? Let’s just call this eDiscovery What-Not-to-Do Number One:

The defendant also filed an emergency motion to stay discovery proceedings with the District Court. Put mildly, this did not provide manifest merriment to the Court:

“This court expected to receive that replacement report in April 2009. The defendant's recent procedural maneuvering prevented the court from having the replacement report timely filed.”


Obligation to Preserve is “Affirmative”

What happens next once again brings to mind the term “flay.” The Court first starts out with a discussion of a party’s duty to preserve evidence together with a brief survey of preservation obligation decisions from federal district courts in the Third Circuit. The Court then relies on Southern District of New York decision and Second Circuit decisional authority when discussing “reasonable anticipation”:

“A duty to preserve is an “affirmative obligation,” which arises “when the party in possession of the evidence knows that litigation by the party seeking the evidence is pending or probable and the party in possession of the evidence can foresee the harm or prejudice that would be caused to the party seeking the evidence if the evidence were to be discarded.” Kounelis v. Sherrer, 529 F .Supp.2d 503, 518 (D.N.J.2008). “

“While a litigant is under no duty to keep or retain every document in its possession, even in advance of litigation, it is under a duty to preserve what it knows, or reasonably should know, will likely be requested in reasonably foreseeable litigation.” Scott v. IBM Corp., 196 F.R.D. 233, 249 (D.N.J.2000); see Winters v. Textron, Inc., 187 F.R.D. 518, 520 (M.D.Pa.1999) (finding that knowledge of even a potential claim is sufficient to impose a duty to preserve evidence); Bowman v. American Medical Systems, Inc., No. 96-7871, 1998 WL 721079, at *3 (E.D.Pa.Oct.9, 1998).”

“ (“A party which reasonably anticipates litigation has an affirmative duty to preserve relevant evidence”); Barsoum v. NYC Housing Authority, 202 F.R.D. 396, 400 (S.D.N.Y.2001) (citing Kronisch v. United States, 150 F.3d 112, 126 (2d Cir.1998) (“A party has a duty to retain evidence that it knows or reasonably should know may be relevant to pending or future litigation.”)). Hohider v. United Parcel Service, Inc., 2009 WL 1163931, at *2 (W.D. Pa. 2009)

Duty of Candor to the Court

It is highly likely that a Court is not happy with counsel for one or more parties to litigation pending before it when a state bar’s rules of professional responsibility are discussed. The Court’s focus here is on the responsibility for candor to the tribunal.

The U.S. District Court for the Eastern District of Pennsylvania, together with nearly every other federal court, requires attorneys practicing before it to comply with rules of professional responsibility effective in the jurisdiction in the Court is situated. Here, the Court discusses the Pennsylvania Rules of Professional Conduct:

Rule 3.3 of the Pennsylvania Rules of Professional Conduct, applicable to attorneys appearing before this court, states in relevant part:

“Rule 3.3. Candor Toward the Tribunal

(a) A lawyer shall not knowingly:

(1) make a false statement of material fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;
In certain circumstances, “failure to make a disclosure is the equivalent of an affirmative misrepresentation.” Rule 3.3 Pa. Rules Prof. Conduct cm. ¶ 3.”Hohider v. United Parcel Service, Inc., 2009 WL 1163931, at 2. The Court then continues with a discussion of “possible misrepresentation”

“Possible Misrepresentations or Omissions by UPS to Plaintiffs and to the Court”

It’s never a good sign (and little room is left for doubt of direction) when a court begins sentence with the phrase “it is apparent” and includes as well the words “not forthright:”

“It is apparent to the court that UPS was not forthright in informing plaintiffs and the court about the nature and scope of UPS's preservation efforts. For example, defendant's counsel wrote a letter to plaintiffs' counsel in 2005 stating that defendant was “in the process of placing a ‘Hold,’ as that term is defined in the UPS Records Manual, on all categories of documents requested by Plaintiffs in the litigation.” (J. Culleiton letter to C. Bagin at 3-4, May 3, 2005.) It was also represented to plaintiffs' counsel that defendant was “even going a step further and disseminating a memorandum to applicable managers throughout the Company which describes the litigation and further details the records that are to be held from destruction.” ( Id.)”

Failure to Disseminate Litigation Hold Memorandum, Failed to Disclose Failure to Disseminate Litigation Hold Memorandum for Nearly Two Years

For the defendant, this was, in technical terms, a double whammy. Failure to disseminate a litigation hold memorandum is bad enough, but in this instance that failure was compounded by an almost two year failure to disclose the failure to terminate. This might be analogized to a criminal action, where the cover-up may be worse than the crime committed.

“Defendant, however, did not issue the hold at that time, did not disseminate the hold memorandum, and it did not advise plaintiffs of its failure to do so. Similarly defendant did not disclose, until after the special master investigation was commenced in August 2008, that a litigation hold was not issued until February 2006-approximately two years after this case was filed.” Id., at 2.

Privilege Assertions and Triggers for Duty to Preserve ESI

In any event, the Court was not amused, and directed the special master to issue a report and recommendation in connection with how, and to what extent, defendant’s actions might have an impact on its assertions of work-product privilege:

“The court directs the special master to review these and other statements made or not made by defendant and its counsel and to make findings and recommendations in the replacement report regarding whether any of defendant's conduct affects its privilege assertions.” Id., at 3

The Court then discusses the first report and recommendation of the special master, but notes that since the report was intended to provide “guidance to the parties,” and had not yet been adopted by the Court, the parties were not required to file objections thereto. That said, the message conveyed is clear, and not pleasant for the defendant’s assertions of privilege:

“The court is very troubled by defendant's efforts to delay or stop the court's resolution of the motion concerning whether defendant failed to preserve electronically stored information (“ESI”).”

“The court reviewed Report and Recommendation Number 1 and Report and Recommendation Number 2. In the first report, the special master made numerous findings and recommendations regarding the trigger to the duty to preserve and the scope of relevant information. The special master recommended that the court reject a number of positions taken by defendant on issues critical to the spoliation analysis.”

“For example, defendant took the position that it had no duty to preserve relevant ESI until the case was certified, some three years after the lawsuit was filed. The special master recommended that the court find that defendant's duty to preserve included ESI. (Report and Recommendation No. 1 at 11-14.) The special master also recommended that the court (a) reject defendant's arguments that certain workers' compensation information was not subject to a duty to preserve ( id. at 21-24), (b) find that the duty to preserve encompassed a broader scope of evidence than defendant contends ( id. at 25-35), (c) and reject defendant's argument that this case be limited to defendant's formal ADA accommodation request process ( id. at 36-44).FN2

“FN2. The parties were not required to object to this first report since it was an interim report by the special master to provide guidance for the parties. At this time, the court has not yet adopted or rejected the special master's recommendations.” Id. at 3

Although the Court has not yet adopted the special master’s report and recommendation, its discussion of defendant’s ESI preservation activity (or non-activity) provides what appear to be broad hints.

The Court then discusses the special master’s report and recommendation on, inter alia, work-product privilege, and the language below suggests that the date of email to which work product privilege is asserted may well support the finding of a contemporaneous ESI preservation trigger date:

“In his report and recommendation on privilege, the special master also recommended that the court reject certain positions asserted by defendant, while at the same time recommending that the court sustain other of defendant's privileges.”

“For example, the special master recommended that the court reject defendant's assertion of privilege over an e-mail dated May 12, 2005 sent by L. Herron (the “Herron Email”). (Report and Recommendation No. 2 at 40-46.) As the court noted at the April 23, 2009 hearing, this email is central to defendant's 2005 preservation efforts and, based upon the court's own review of this email and the evidence defendant offered in support of this privilege, the court concludes there is little likelihood that this court could find the Herron Email to be privileged. Id., at 3

Privilege Waiver by Forwarding to and from Non-Lawyers

The Court also notes (but keep in mind that this report and recommendation has not yet been adopted) that the interposing a non-lawyer in an email string might result in a waiver of work-product privilege.

“The special master also recommended that the court overrule defendant's privilege assertions relating to the emails sent by non-lawyers to other non-lawyers forwarding the Herron Email. ( Id. at 46-49.) Id., at 3.

Defendant’s Procedural Gamesmanship

Think the situation could get any worse for defendant? Think again. Defendant’s counsel’s post-appeal filing activities did nothing to endear itself with the Court. Put another way, a court’s characterization of “timing and motives” as “suspicious” is an event neither a party nor counsel should ever want to experience. That said, defendant’s actions were, well, they speak for themselves. Defendant sought to stay or halt the activities of the special master, while simultaneously violating a court order to submit withheld documents for in camera review.

“After the special master issued these two reports, defendant undertook certain actions to delay or stop the investigation ordered by this court. First, defendant asked the United States Court of Appeals for the Third Circuit to stay the court-ordered special master's completion of his duties. Second, defendant refused to submit the withheld documents for in camera review. The defendant's timing and motives appear suspicious for the reasons more fully explained at the April 23, 2009 hearing. Id., at 3.

Bad, bad juju. The Court appeared to be especially irked because under the special master appointment order, defendant had a continuing right to request that the court review any actions taken by the special master as inappropriate or burdensome. In all that time, defendant had not sought any such review.

“Under the special master appointment order, defendant has the right and ability to seek this court's review of anything the special master did or did not do...Because defendant did not do so, the court is skeptical about the timing of defendant's recent actions.

“In particular, the court is concerned that defendant is seeking to delay or stop the court's ability to resolve the pending motion for sanctions, because the special master is uncovering information defendant was otherwise loathe to disclose in a timely and cooperative manner and because defendant does not like the recommendations the special master has already made to the court.”

In Camera Review of Withheld Documents Ordered

It appears that defendant had attempted to pull out all procedural stops in an attempt to delay or prevent the disclosure of documents withheld on the basis of its assertions of work-product privilege. By April 2009, defense counsel’s changed its approach in its characterization of the withheld documents, but again, the Court wasn’t in a buying mood:

“At the hearing April 23, 2009, defense counsel represented to the court that the withheld documents are innocuous emails. The court, however, can not determine the import of the withheld documents without reviewing them in camera.”

Defense counsel argument that it was not required to comply with an order compelling production for in camera review of allegedly privileged documents fell on deaf ears. I had to read the line beginning with “[No lawyer had ever previously advanced to this court..” a few times before I realized that the Court meant “No lawyer has ever” as in ever, in any other litigation:

“With respect to the court's order requiring defendant to produce documents for in camera review, the court found no precedential authority in support of the defendant's refusal to comply with that order. No lawyer had ever previously advanced to this court the argument that a trial court may not review allegedly privileged documents in camera. Indeed, the court is frequently called upon to review such documents because it is the only way, in many cases, to determine whether the documents are privileged.” Id., at 4


Another hint that the creation date of a document to which work product privilege is alleged to attach may trigger a duty to preserve:

“In this case, the court finds that in camera review is not only proper, but necessary for several reasons:

“...No litigation hold was issued by defendant for approximately two years after this case was filed and the withheld documents relate to the delay in issuing the litigation hold.

The Court also provides an indication that defendant’s activities may constitute waiver of the privilege.

“Without reviewing the documents, it is impossible to determine whether the privilege over such documents was waived through defendant's conduct in this case-conduct that the court views as troubling and which may implicate a potential basis for waiver.” Id., at 5

Result: Defendant’s emergency motion to stay proceedings denied, special master to submit report and recommendation on privilege by May 4, 2009.

Author’s note: It appears that the Court reserved a decision on the “pending motion for sanctions.” Stay tuned.