Zubulake Revisited: Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC

Article

E-Discovery Alert

January 28, 2010

By: Jeffrey L. NagelMelissa DeHonney

Approximately six years after deciding the trailblazing and now seminal electronic discovery decisions Zubulake v. UBS Warburg LLC (“Zubulake IV”), 220 F.R.D. 212 (S.D.N.Y. 2003), and Zubulake v. UBS Warburg LLC (“Zubulake V”), 229 F.R.D. 422 (S.D.N.Y. 2004), Judge Shira A. Scheindlin has again undertaken the judicial role of expounding on the duty to preserve and produce electronically stored information (“ESI”) and the sanctions available when those duties are breached. On January 11, 2010,1 in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, Case No. 05 Civ. 9016, 2010 U.S. Dist. LEXIS 1839 (“University of Montreal”), Judge Scheindlin admonished the plaintiffs-spoliators for failing to heed the now well-established rules articulated in Zubulake and made it clear that the “rule of lenity” — which courts sometimes invoke in forgiving (even if only to a limited degree) breaches of the duty to preserve where an underlying obligation is not clearly defined — may no longer apply when a litigant fails to implement a written litigation hold to preserve relevant evidence:

Possibly after October, 2003, when Zubulake IV was issued, and definitely after July, 2004, when the final relevant Zubulake opinion was issued, the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.

2010 U.S. Dist. LEXIS 4546 at *10 (emphasis in original). Thus, it is now beyond question that if a party is already embroiled in or reasonably anticipates litigation, that current or prospective litigant, together with its counsel, absolutely must issue a timely, written litigation hold and implement and oversee the execution of that hold diligently and in good faith, or face sanctions.

Plaintiffs in University of Montreal sought $550-million in losses arising out of the liquidation of two hedge funds in which they were shareholders, asserting claims under the federal securities laws and New York law. Some of the defendants (the administrator of the funds and related parties, referred to collectively in the decision and here as the “Citco Defendants”) claimed that substantial gaps existed in the document productions of thirteen of the ninety-six plaintiffs and moved for sanctions at the close of discovery, alleging that these plaintiffs breached the duty to preserve, collect and produce both ESI and paper documents. The Citco Defendants sought terminating sanctions (dismissal of the complaint) or any lesser sanction the court deemed appropriate. Resolving the Citco Defendants’ motion largely in their favor, Judge Scheindlin issued a lengthy, well-organized opinion in which she labored to define — for the benefit of litigants, practitioners and fellow jurists alike — what types and quantum of acts and/or omissions amount to negligence, gross negligence and willful, bad faith misconduct in the e-discovery context. These varying culpable states of mind dictate both the proof that the party seeking sanctions for spoliation of evidence must adduce and also the remedies available to punish the spoliator for its offending conduct.

Culpable conduct giving rising to sanctions may be found where a party falls short in carrying out its duties in any of the steps in the discovery process, including the preservation, collection, review and/or production of relevant evidence. The degree of culpability depends on the circumstances. For example, in the context of the duty to preserve, the failure to timely issue a written litigation hold may constitute gross negligence, depending on when the preservation obligation attached (pre- or post-Zubulake) and other attendant circumstances. With respect to collection efforts, Judge Scheindlin noted that “the failure to collect records — either paper or electronic — from key players constitutes gross negligence or willfulness,” but, in contrast, “the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players, likely constitutes negligence as opposed to a higher degree of culpability.” Id. at *12 (emphasis in original).2 Judge Scheindlin declined to proffer and categorize an exhaustive list of offending conduct, noting instead that “[e]ach case will turn on its own facts and the varieties of efforts and failures is infinite.” Id. at *12-13. Nonetheless, given the breadth of culpable conduct addressed in University of Montreal, it is particularly useful as a metric for gauging an alleged spoliator’s degree of culpability.

Quoting the well-known treatise Prosser & Keeton on Torts, Judge Scheindlin defined gross negligence as “‘a failure to exercise even that care which a careless person would use” and further noted that it “‘differs from ordinary negligence only in degree, and not in kind.’” Id. at *9. Judge Scheindlin applied this general standard and found that six of the thirteen plaintiffs against which the Citco Defendants sought sanctions were grossly negligent. Each of these plaintiffs engaged in some combination of the following misconduct:

    • where the duty to preserve arose in April 2003, waiting until 2007 to issue a written litigation hold and failing to include, among other things, appropriate instructions to suspend the routine and ad hoc deletion of ESI, including that ESI contained only on backup tapes;
    • failing to actually suspend the routine and ad hoc deletion of ESI following the onset of the duty to preserve;
    • failing to actually preserve, collect and produce any ESI, or producing only a paucity of ESI;
    • failing to remind custodians of relevant evidence of the continuing nature of the duty to preserve during a three year discovery stay pursuant to the Private Securities Litigation Reform Act;
    • failing to request documents from each of the “key players” involved in the transactions and occurrences giving rise to the litigation, including former employees, where the producing party has the “practical ability” to obtain documents from the former employees;
    • failing to request documents that are located off-site, e.g., on an employee’s personal computer or hand held device;
    • following-up with employees in only a perfunctory way without probing in at least some detail the basis for their assertions;
    • preserving relevant evidence but failing for several years to deliver it to outside counsel;
    • belatedly producing relevant evidence — in the case of one plaintiff-spoliator, waiting until it was faced with sanctions to produce “thousands of pages” of documents;
    • restricting searches to specific folders believed to contain all relevant documents and failing to ensure that all relevant repositories of ESI are searched including, for example, the “company’s central files”;
    • delegating preservation and collection efforts to an employee who is ill-equipped to effectively manage the process in that the employee (i) had no experience conducting searches, (ii) received no instructions concerning how to conduct searches, (iii) was not supervised during the collection process, (iv) failed, for example, to follow-up on an oral request for documents made to a remote office likely to have relevant documents and (v) was not in contact with outside counsel during the search; and
  • in the context of discovery directed at the alleged spoliation, submitting declarations that (i) are false or misleading, (ii) in whole or in part, contain information that is not within the personal knowledge of the declarant and/or (iii) contain statements that were not fully investigated by the declarant prior to execution, such as, for example, a declaration attesting in conclusory fashion that “all” relevant documents have been produced when that plainly is not the case.

On account of this misconduct, Judge Scheindlin ordered that at the trial of this action the jury will be instructed that (i) as a matter of law, the grossly negligent plaintiffs “failed to preserve evidence after [their] duty to preserve arose,” (ii) the jury may, if it chooses, presume that the lost evidence was both relevant and would have been favorable to the Citco Defendants and (iii) if the jury chooses to adopt these presumptions, and the plaintiffs-spoliators do not adequately rebut them, the jury may infer that the lost evidence would have been favorable to the Citco Defendants. Id. at *105-08. Additionally, Judge Scheindlin imposed monetary sanctions on each of the plaintiffs-spoliators (including those found to have acted merely negligently), awarding the Citco Defendants their “reasonable costs, including attorneys’ fees, associated with reviewing the declarations submitted, deposing these declarants and their substitutes where applicable, and bringing this motion.” Id. at *108. None of the plaintiffs was found to have willfully breached their discovery obligations, but Judge Scheindlin, again quoting Prosser & Keeton on Torts, indicated that discovery misconduct would be deemed willful, wanton and reckless where “‘the actor has intentionally done an act of an unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow ….’” Id. at *9.

Judge Scheindlin also found that each of the remaining seven plaintiffs was negligent in carrying out its discovery obligations as a result of having engaged in conduct similar in kind to that which is enumerated above, but to a lesser degree. For example, Judge Scheindlin found that The Corbett Foundation acted negligently with respect to its discovery obligations where (i) the “palm pilot” of Richard Corbett (a key player) was not searched for responsive emails, (ii) its employees were not instructed to preserve their emails and papers documents and (iii) consequently, it failed to produce twenty-two emails that the Citco Defendants were able to specifically identify. Id. at *93-95. In addition to the monetary sanctions imposed on all of the plaintiffs-spoliators referred to in the preceding paragraph, certain of the negligent plaintiffs-spoliators were ordered to conduct further discovery at their expense.

University of Montreal teaches that, since the contours of a litigant’s duties to preserve, collect, review and produce ESI have crystallized in recent years, both counsel and the litigants they represent are expected to conform their conduct to the governing rules of law. Courts today (especially federal courts) are far less forgiving of litigants (and their counsel) for failures related to the production of ESI and will more readily impose harsh sanctions — such as a permissive jury charge enabling an adverse inference to be made — for misconduct that, in the past, may have been considered a “grey area” and was unlikely to result in sanctions. While this notion may seem daunting to some, it bears mentioning that, as Judge Scheindlin noted, “[c]ourts cannot and do not expect that any party can meet a standard of perfection.” Id. at *1. All that is required is good faith adherence to established rules of law.


1 By order dated January 15, 2010, Judge Scheindlin amended, in small part, the order that was entered on January 11, principally to clarify that the obligation to preserve back up tapes arises only where they are the sole source of relevant evidence. The citations in this case alert are to the amended order, which is located at 2010 U.S. Dist. LEXIS 4546.
2 After the original publication of this article, Judge Scheindlin issued an Order dated May 28, 2010 amending this language to read: “By contrast, the failure to obtain records from all those employees who had any involvement with the issues raised in the litigation or anticipated litigation, as opposed to just the key players, could constitute negligence.”