The article below was published in the September 2018 edition of Law Journal Newsletters Cyber Security Law & Strategy.
Early 2018 E-Discovery Case Law Review: Sanctions and the Reasonableness of TAR
By Mike Hamilton, Director of Marketing Programs, Exterro
Klipsch Group v. ePRO E-Commerce, Schmalz v. Village of Riverside, and In Re Broiler Chickens reinforce the distinction between sanctions based on “intent to deprive” and gross negligence, as well as defining what a reasonable technology-assisted review (TAR) process should look like. These three cases from early 2018 stand above many others for the impact they will have on both sanctions and e-discovery review processes moving forward.
Circuit Court Rules E-Discovery Sanctions Not Limited by Amount in Controversy
Klipsch Group, Inc. v. ePRO E-Commerce (2nd Cir., Jan 25, 2018)
Even with the enactment of Rule 37(e), which tries to curb when and how much e-discovery sanctions should be, the court can use its inherent authority to sanction parties as they see fit to make the non-offending party whole, regardless of the amount in controversy.
In this counterfeiting case, the plaintiff, Klipsch, moved for e-discovery sanctions against the defendant based on the alleged spoliation of discoverable information.
The goal for the plaintiff in discovery was to learn more about magnitude of the defendant’s infringing sales by reviewing the defendant’s actual sales data. As discovery began, it was evident that the defendant was not complying with its e-discovery obligations, showcased by:
- Twice failing to place an adequate legal hold on electronic data including emails (initially after the start of litigation and subsequently after being reminded by the court)
- Not disclosing 40,000 potentially relevant sales documents
- Custodians “manually delet[ing] thousands of files and emails, us[ing] data-wiping software”
Based on these findings, the district court found that the defendant had “willfully spoliated relevant discoverable information,” ordering an adverse inference jury instruction, and imposed $2.7 million in sanctions to cover the costs incurred by the plaintiff because of the discovery misconduct.
The defendants appealed the ruling, arguing that the $2.7 million sanction was disproportionate and impermissibly punitive considering the amount in damages was only likely to be around $20,000.
- Defendant’s Appeal Denied. In response to the defendant’s interlocutory appeal, the Second Circuit unanimously upheld the district court’s factual findings and sanction order, ruling that the sanction amount was not excessive.
- Sanction Was Not Punitive. The $2.7 million sanction was justified because the defendant “overlooks the fact that ePRO (defendant) caused Klipsch (plaintiff) to accrue those costs by failing to comply with its discovery obligations.” The court added, “The proportionality that matters here is that the amount of the sanctions was plainly proportionate—indeed, it was exactly equivalent—to the costs ePRO inflicted on Klipsch in its reasonable efforts to remedy ePRO’s misconduct.”
- Good Faith Discovery Required. The court went on to state that when it comes to discovery obligations, “compliance is not optional or negotiable. Rather, the integrity of our civil litigation process requires that the parties before us, although adversarial to one another, carry out their duties to maintain and disclose the relevant information in their position in good faith.”
“The point that leaps out from the case is that the sanction is going to be equivalent to what costs were inflicted by the wrongful conduct. Discovery is an essential component of the legal process, and the court is saying don't mess with discovery. Make sure that you are providing full and accurate discovery. The courts still have inherent authority to impose sanctions where there is vexatious conduct—and here the conduct was egregious, and the party responsible for it had to pay.”
- Thomas Vanaskie, U.S. Court of Appeals, 3rd Circuit
50 Lost Text Messages Lead to E-Discovery Sanctions
Schmalz v. Village of North Riverside, et al. (N.D. Ill, March 23, 2018)
Defined policies and procedures for identifying if relevant mobile data exists and taking proactive steps to preserve are a must have in today’s litigation world. Without them, opposing parties will file for sanctions, and, as in this case, you will be sanctioned.
In this employment law case, the defendant admitted to failing to preserve any text messages, leading to the spoliation of 50 relevant text messages.
The following events led to the defendant’s loss of the text messages:
- In the defendant’s deposition, he admitted that he had “at least 50” text messages that were relevant to the case.
- When the plaintiff issued a discovery request for those text messages, the defendant responded that the text messages could not be produced because the defendant no longer had the cell phones from which the text messages were sent.
- The defendant admitted to (1) receiving a legal hold notification and (2) not taking any steps to preserve the lost text messages.
As a result, the plaintiff asked for dispositive sanctions under Rule 37(e)(2), either striking the defense or ordering an adverse inference instruction.
- Gross Negligence, Not Bad Faith. The court ruled that the evidence proved that defendants’ failure to preserve a few cell phones within their control was gross-negligence, not bad faith. Intent to deprive was not established. Thus, the court did not find the requisite intent to order an adverse inference instruction rather a lesser sanction was appropriate.
- Sanctions Ordered. The court did order sanctions: (1) permitting the plaintiff to present evidence at trial concerning the negligent text message loss, (2) giving plaintiff the opportunity to argue that they should presume that the contents of these texts would be contrary to defense witnesses testimony, and (3) awarding the plaintiff attorneys’ fees and costs.
“It's important to get to your custodians, particularly the key custodians, early to ask them that question about what information exists on their phones. It's not only texts; it's WhatsApp, SnapChat, and all of the other new communication applications that come out all of the time. Get your arms around that information early and figure out how best to preserve it. Even if you're not going to review and produce it immediately, have an answer to the question of how you're going to get that preserved.”
- Anne McCray, Esq., Partner, McGuireWoods
Court Provides a Template for TAR… And It Includes Cooperation
In Re Broiler Chicken Antitrust (N.D. Ill., Jan 3, 2018)
If you’re going to use technology assisted review (TAR), review the order used in this case, which gives a detailed blueprint for managing the TAR process. It’s important to note that cooperation between opposing parties, including frequent communication and good faith efforts, matters arguably just as much as the technology being used in the case.
In this class action lawsuit, the plaintiffs alleged that companies in the broiler chicken industry were colluding to limit the supply of chickens to raise, by almost 50 %, the prices consumers would need to pay for chicken. In this document-intensive antitrust case, the judge appointed a special master to help the parties resolve e-discovery disputes.
The court issued a long, very detailed procedure for how the parties were to conduct TAR, including search, validation and document sourcing approaches. The order is split into three primary sections: (1) How the parties will act, (2) what search technologies will be used, and (3) outlines a document review validation protocol.
- Detailed TAR Process Defined. The court’s order addresses elements of the review process including: (1) How the parties will act, (2) what search technologies will be used, and (3) outlines a document review validation protocol.
- Cooperation between Parties Mandated. Equally important to the technology to be used in document review, the ruling stipulates that the parties communicate frequently, proposing and revising search terms by “work[ing] together in good faith.”
- Court Retains Final Authority. While the ruling puts the onus of cooperation on the parties, it retained the Special Master’s prerogative to provide “assistance… in resolving such disputes” and “render a decision, subject to the Parties’ rights to petition” when the plaintiff and defendant could not reach agreement.
“Seven or eight years ago, people were predicting technology-assisted review would replace human review and make discovery much less expensive and much faster. That has not come to pass. One of the reasons it's not being used is because people are afraid of these kinds of complexities and detailed protocols, which could end up costing more to follow. It may continue to discourage a lot of parties from what otherwise could be beneficial in terms of cutting discovery cost through using predictive coding.”
- David Cohen, Esq., Head of E-Discovery Group, Reed Smith LLP
These three decisions have helped clarify two key issues in e-discovery processes. First, while sanctions can be levied in cases of gross negligence, the most serious risks arise from “intent to deprive” and egregious e-discovery misconduct. Second, whatever TAR process is used in e-discovery, it must be underpinned with good faith and cooperation in order to satisfy the courts.