By Zachary G. Newman and Jonathan M. Proman -- U.S. District Judge Shira Scheindlin, the leading judicial authority on e-discovery, levied a hearty reminder earlier this year that e-discovery sanctions remain in vogue and are not going away. It is now clear that even unintentional conduct may result in six-figure sanctions; and your subjective good faith or lack of technological expertise may not be a defense. The results matter, not the efforts undertaken to protect or preserve the evidence. Where evidence has been lost or destroyed, this fact, by itself, can cause your company to be deemed by a court as having been negligent or grossly negligence in connection with e-discovery duties, necessitating fines and attorneys’ fees against you. This latest decision must be heeded carefully in the fraught-with-litigation hedge fund and private equity industry. But fear not: proper planning can ensure you avoid the e-discovery anvil.
Judge Scheindlin’s Latest Ruling
E-discovery rules first coalesced during 2003 and 2004 in a series of rulings by Judge Scheindlin known as the Zubulake decisions (named after Laura Zubulake, a plaintiff in a gender-discrimination case). Judge Scheindlin’s newest decision, Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010), significantly alters the ground rules for preserving and storing electronically stored information relevant to an anticipated federal lawsuit.
In Montreal Pension Plan, aggrieved investors sued for $550 million after two British Virgin Island-based hedge funds in which they purchased shares entered receivership and were subsequently liquidated. Several defendants discovered gaps in the plaintiffs’ document production, and upon that discovery seized the opportunity to go on the offensive against their accusers. Depositions were taken as to plaintiffs’ information-retention efforts, sworn statements as to information preservation were procured, yet the court imposed sanctions even though intentional wrongdoing was absent. The court, specifically noting that this was not a case of “egregious examples of … destroying evidence,” sternly warned that companies must preserve, collect, and review potentially-relevant information in a meaningfully-diligent way whenever litigation reasonably is anticipated.
Hindsight Reigns Supreme - Anything Lost, Even Innocently, May Result in Sanctions
What makes Judge Scheindlin’s decision relevant is that you now have an obligation to preserve electronic information as soon as litigation reasonably is anticipated, meaning that your preservation obligations can be triggered before the lawsuit is even started. The court’s decision makes clear that your best efforts may not satisfy the court and that lost or destroyed information potentially relevant to a litigation could result in a finding of negligence. Even unintentional negligence can result in a material sanction against your company. To paraphrase the court, “a pure heart and an empty head” is no defense.
What Must Be Done?
Rest assured, the purpose of e-discovery rules is not to terrorize the business community; rather, it merely is to ensure potentially-relevant information is preserved (to assist in the truth-finding litigation process). Road signs provided by the court help guide your company’s specific duties and obligations. For example, once litigation is reasonably anticipated:
A litigation hold letter must circulate, in writing, throughout the company.
You must affirmatively investigate for potentially-relevant information - this means sleuthing.
The time and expense of compliance is a cost you should incur because of the judge-made law and the consequences of non-compliance can be significant.
Whether reasonably-anticipated litigation exists to trigger e-discovery duties is an objective analysis. You will be judged, in Judge Scheindlin’s words, “through the backward lens known as hindsight.” Some per se rules exist; quotations from Judge Scheindlin include (a) a “failure to issue a written litigation hold constitutes gross negligence” as a matter of law; (b) a “failure to collect records - either paper or electronic - from key players constitutes gross negligence or willful [misconduct];” and (c) “failure to assess the accuracy and validity of selected search terms” also constitutes negligence. Each of these shortcomings could result in material sanctions such as those issued by Judge Scheindlin.
Post-Preservation Steps -- Information Collection and Review
The above are just the initial steps. Now that you’ve preserved everything potentially-relevant to a litigation, what must you do with it? Collection and review also are critical stages to complying with your discovery obligations. You and your counsel must take the initiative, remembering that a hindsight standard will apply. Your obligations include (but are not limited to) taking the initiative to determine what persons and places house relevant information from among the many databases you preserved and having counsel review documents for discoverable information.
With the pervasiveness of digital communications, it is not uncommon for there to be millions of documents, hard copy and electronic, to be culled and reviewed. Electronic discovery is a real cost of doing business in America these days, and it is important to remind your colleagues and employees that electronic data has become a centerpiece in many business disputes.
Penalties For Breach of Duty
Although the paramount focus of any company should be compliance with e-discovery duties, it is worthwhile to bear in mind the penalties your efforts can avoid: (i) fines and cost-shifting (which according to the court, are the “less severe sanctions”); (ii) default judgment or dismissal of your lawsuit; and/or (iii) evidence-related penalties, such as an adverse jury instruction. Sanctions are imposed on a case-by-case determination and is within a judge’s sole discretion.
E-discovery rules, although designed to preserve information material and necessary to anticipated or pending disputed, certainly impose a new layer of overhead upon the lending, hedge fund, and private equity industry (and American business in general). Knowing the rules and your obligations is the first step, and when one’s e-discovery duties are fulfilled with reasonable diligence, a business may stand confident that it will not fall victim to the e-discovery anvil.
Zach Newman is a litigation partner and Jon Proman is a litigation associate at Hahn & Hessen LLP, a New York-based firm serving the legal needs of the financial, hedge fund, and private equity community for the past seventy-five years. To learn more about e-discovery, please contact Zach at email@example.com. None of the information contained herein should be used or relied on as legal advice or opinion about specific matters, facts, situations, or issues.