Electronic Discovery and Lessons from the University of Montreal Case

Anyone involved in a lawsuit may be asked to deliver copies of documents to the other side. As more and more businesses go paperless and people rely on e-mail and other electronic communications, saving and producing electronic records has moved to the forefront of disputes. On January 10, 2010, a federal court in New York issued an unusually strong order describing what people need to do to ensure that their records are available when requested. This is likely to become a leading opinion on the subject in federal cases. I expect that Oregon and Washington state courts are likely to set similar standards.

Although most of the problems in lost document situations involve businesses with many employees, it is also possible for individuals to lose documents.  For example, in divorce cases, financial records often are important.  If these aren’t kept, it may prove necessary to get new copies.

The problem came up in a securities case involving almost 100 investors, led by the Pension Committee of the University of Montreal Pension Plan, who sued various managers, administrators, auditors, directors, brokers, and custodians of two hedge funds that failed in 2003. The defendants claimed that thirteen of the plaintiffs had not properly saved and delivered electronic records, and asked the court to penalize the plaintiffs.

The court found all thirteen of the challenged plaintiffs were careless in preserving electronic records, resulting in the loss of records, but that nothing was purposefully destroyed.

The court’s analysis of the case took four steps:

1.    How bad was the plaintiffs’ behavior?

2.    How does the duty to preserve evidence interact with loss of records?

3.    Who has to prove that evidence has been lost or not lost?

4.    What remedy should the court order?

How Bad is Bad?

The court started by describing the usual standards of negligence, gross negligence, and willfulness as the benchmarks for bad behavior in document production. Basically, negligence is unreasonably failing to protect someone else’s interests; in this context, the defendants’ rights to see the records.  Gross negligence is failing to do what even a careless person would do. Willfulness, wantonness, and recklessness all refer to intentional disregard of a known or obvious risk, bad enough to make harm very likely to result.

In other contexts, negligence is ordinary speeding.  Gross negligence, according to one Oregon case, is taking a curve 20 to 30 mph faster than a warning sign.  Recklessness, according to another Oregon case, is trying to pass a car going 70 mph on a two lane road with traffic coming the other way.

In the document production context, failing to preserve records is negligent.  Failure to issue a written order to employees to preserve records may be gross negligence.  Intentional destruction of records when they should be preserved is willful.

Similarly, failing to collect records from anyone who may have them is generally negligent.  Failing to collect records from important people is likely to be grossly negligent or willful.  In addition, because earlier cases have generally recognized the importance of electronic records since 2004, any of the following probably is grossly negligent:

1.   Not issuing a written “litigation hold” memo.

2.   Not identifying key players and preserving all of their records.

3.   Not ordering that e-mail be retained.

4.   Not preserving records of former employees.

5.   Nor keeping backups.

Preservation and Destruction

The law has long recognized a duty to preserve evidence.  Loss of evidence can be penalized by the courts.

The duty starts when there is a reasonable chance of a suit.  Plaintiffs should start preserving evidence once they start considering making a claim, which may be when they start documenting the case, or consult a lawyer or expert, or other similar event.  Defendants should start when an obviously serious incident occurs, or they are notified that a plaintiff has hired a lawyer, or when a demand is received, or something similar.

Who Proves What?

Once it is clear a document has been lost, the next question is what can be done about it.  Sometimes, other documents or witnesses can help reconstruct the lost document.  If not, the Montreal court recognized two questions:

1.   Who has to prove that the evidence is permanently lost?

2.   Who has to prove that the innocent party has suffered harm?

Fines and orders to pay the other side’s attorney fees are considered minor penalties.  These usually are imposed solely as a result of improper handling of documents.

More significant penalties affect the outcome of the suit.  This can run to the level of dismissal, barring a party from making a particular argument, or allowing or instructing the jury to infer that the lost evidence would have proven or disproven a point.  Before these penalties are imposed, the courts generally want proof that lost documents would have proven a significant point and that the loss harmed the party asking for the document.  Gross negligence, however, may allow the court to force the party who lost the document to prove that it was not harmful and not important.

Remedies

The remedy for failure to provide documents varies from case to case.  As noted above, it can range from allowing more discovery (such as a forensic search of the computers) to dismissal.  The court recognized three goals to be met:

1.   Deterring loss of evidence.

2.   Placing the risk of a wrong judgment on the party who created the risk.

3.   Restoring the harmed party to the position it would have been in had the documents been produced.

Courts usually impose the minimal penalty to meet these goals.  For example, cases usually are dismissed only when perjury, evidence tampering, or intentional and complete destruction of evidence or refusal to respond to a request has occurred.

In the Montreal case, the court chose a range of jury instructions and orders to pay legal fees to the affected defendants.

It appears the earliest indication of a potential suit for any of the Montreal plaintiffs was in March 2003, when two sets of plaintiffs hired lawyers.  The court found that by April 2003, all of the other plaintiffs should have known that a lawsuit was possible, and that they should have started preserving documents then.  Potential plaintiffs began coordinating their efforts in mid-2003, and the suit was filed on February 12, 2004.

In October or November 2003, the lead attorney instructed the various plaintiffs to collect and preserve documents, with specific instructions to include e-mail and electronic documents.  The court found that this was not a sufficient “litigation hold” instruction.  What the should have been done was to preserve all relevant records and set up a procedure to collect the records for review.  Because of pending motions, discovery did not begin until May 2007.  The first full litigation hold was not ordered until about that time.

It was soon realized that documents were missing from the discovery.  The court ordered the plaintiffs to report on their document preservation and to search for the missing documents.  Eventually, a total of 311 documents were found to be missing, and that most of the plaintiffs’ reports were either false, misleading, or signed by people who did not know what they said.

Of the 13 plaintiffs against whom penalties were requested, one had no connection with any of the missing documents.  Three were found not to have had possession or control of the documents in April 2003.  The other nine were found to have lost documents.

The court also found that all of the plaintiffs were institutional investors obligated to conduct due diligence before investing.  The records of the due diligence were extremely sparse, and the court concluded that records were lost or destroyed by all 13 plaintiffs.

Because the case was transferred from Florida to New York in 2005, and the Florida courts had not yet clearly recognized preserving electronic documents, the court ruled that litigation holds should have been issued in 2005.  The failure to issue the holds normally would be grossly negligent.  Because the law was not clear when the suit was filed, however, the court decided that failing to issue the holds was not enough by itself to reach the level of gross negligence.  Also, because none of the lost documents were lost after 2005, the court found no major harm from after 2005.

Instead, the court found that the plaintiffs’ failure to conduct a proper search before 2005 and failure to supervise or monitor document collection by their employees was either negligent or grossly negligent.  One plaintiff admitted it destroyed backups in 2004.   Several plaintiffs failed to collect and preserve documents of important people, including directors and members of investment committees.

In its final review, the court found six plaintiffs to be grossly negligent and seven to be negligent.  The court found that the grossly negligent plaintiffs did cause harm to the defendants, and announced that it would allow the jury to presume the contents of the missing documents and the harm to the defendants, subject to the plaintiffs’ right to disprove the presumption.  In addition, the grossly negligent plaintiffs were ordered to pay costs and attorney fees involved in the discovery dispute.

As for the negligent plaintiffs, the court noted that the identified missing documents were eventually recovered from other sources.  As a result, there was no actual harm from the failure to preserve the identified missing documents.  On the other hand, the court found that although the unidentified missing documents would have been relevant, the defendants did not prove harm that they were harmed.  As a result, the only penalty imposed was an award of costs and attorney fees.

In addition, two of the plaintiffs, who admitted that they had not searched some backup tapes, were ordered to do so within 30 days and provide any documents that might have been requested.

Application to Oregon and Washington State Court Cases

Oregon does not appear to have a clear standard for preservation of records.  Document production, however, is one of the most important pretrial exchanges of information in Oregon.  I predict that if ruled upon, the Oregon courts would impose strict duties to protect documents.

One significant issue that you should be aware of is that Oregon courts are allowed to dismiss cases even without proof of harm if a party has acted willfully or in bad faith.  As a result, if your case may go to Oregon state court, you probably should be even more careful with your records than usual.

Washington has read its discovery rules to impose similar standards for all documents, paper or electronic, so the Montreal standard is likely to be followed.

What You Should Do

The Montreal plaintiffs were handling their own documents very badly.  A series of lessons can be taken from the opinion.

1.   Once you think you are going to be involved in a suit, do not delete any related electronic records without making a backup.  This should start as soon as you decide you want to make a claim or once notice of a problem is received.  Until you realize this, however, you are generally free to maintain a regular document purge schedule.

2.   Once you think you are going to be involved in a suit, circulate a “litigation hold” memo to ensure that all documents are preserved.  Ask a lawyer for help preparing this memo.  It should suspend any regular purge policy, instruct all employees to preserve anything potentially related to the case, and order that the documents (or copies) be collected in a location that they can be easily reviewed by either the lawyer or a person other than the employee who holds the document.

3.   If you have to collect documents from other people, supervise and monitor the collection.  That may mean to make sure you get everything.  If the person who is handling matters is inexperienced in document retention and discovery searches, training and regular contact with lawyers is advisable.

4.   Know who the key players are with regard to any issue that might cause trouble.  If trouble comes, immediately order them to preserve records.

5.   If someone leaves records in your possession, custody, or control, identify what issues they may relate to, and if any of those issues lead to possible suits, preserve those records.

6.   When the document request arrives, think carefully about your search terms so that you don’t miss anything.

7.   Don’t lose your backups – but do review them when the document request arrives.

8.    Don’t let your staff mislead you or your lawyers.

In addition, anyone who stores data on a “cloud computing” (Internet storage) service probably should ask for a copy of the service’s retention policies, and, if the possibility of a suit arises, regularly make additional backups on their local systems.

On a practical point, judges don’t like to be bothered with discovery disputes.  They assume that most people should act reasonably and follow the rules.  Because of this, there is always a risk that anyone found to be withholding documents will be penalized severely.  It’s often not worth it to get into one of these fights.

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One Response to Electronic Discovery and Lessons from the University of Montreal Case

  1. Excellent article that lays down specific duties on Law Firms in Court cases that involves e discovery orders. Must Read.

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