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Judge Shira Scheindlin (S.D.N.Y.) “Revisits Zubulake” in Pension Committee of the Univ. of Montreal Pension Plan, et al., v. Banc of America Securities, LLC, et al.

January 1, 0001

 

UPDATE — On January 15, 2010, Judge Scheindlin withdrew her original Order and replaced it with an Amended Opinion and Order that revised certain of the language in the original Order.  Click to read about the amended Order.


Judge Shira Scheindlin (S.D.N.Y.) “Revisits Zubulake” in Pension Committee of the Univ. of Montreal Pension Plan, et al., v. Banc of America Securities, LLC, et al.

In an 87-page opinion released this week, Pension Committee of the Univ. of Montreal Pension Plan, et al., v. Banc of America Securities, LLC, et al. (“Pension Committee”), Judge Shira Scheindlin of the Southern District of New York granted sanctions against 13 plaintiffs for their failure to properly preserve, collect and produce electronic documents.[1] Judge Scheindlin subtitled the opinion “Zubulake Revisited: Six Years Later.” She observed that, six years after the Court’s series of ground-breaking Zubulake opinions and decades after courts first addressed the discovery of electronic evidence, litigants are still conducting electronic discovery in an “ignorant and indifferent fashion.”[2] The Court then reviewed the steps a party is required to take to properly preserve evidence, and provided a legal framework for determining the severity of sanctions that may be issued against parties who fail to take those steps.

This Client Alert highlights the elements of Pension Committee that are likely to have the greatest impact on current e-Discovery practice and identifies a number of Practice Tips resulting from this decision.

Overview of Facts and Holding

Plaintiffs are 96 investors in certain offshore hedge funds.[3] The funds failed and were liquidated, and plaintiffs collectively lost $550 million.[4] In an attempt to recover their losses, plaintiffs asserted federal securities law violations against several hedge fund administrators, including Citco Fund Services (Curacao) N.V. and The Citco Group Ltd. (which, together with individual defendants, the opinion refers to as the “Citco Defendants.”)[5] The lawsuit was filed in 2004. Pursuant to the Private Securities Litigation Reform Act (“PSLRA”), discovery was stayed until 2007.

Plaintiffs had collected and produced electronic documents twice during this litigation: First when the lawsuit was filed in the 2003-04 timeframe; and then again when the PSLRA stay was lifted in 2007. The Citco Defendants subsequently complained that plaintiffs’ document production was incomplete.[6] The Court ordered each plaintiff to provide a declaration stating their efforts to preserve and produce documents.[7] Each plaintiff’s declaration identified the steps taken to locate and preserve documents, and stated that plaintiffs had collected and produced “all” relevant documents in their possession.[8] The Citco Defendants then deposed some of the declarants, and concluded that “almost all of the declarations were false and misleading and/or executed by a declarant without personal knowledge of [the declaration’s] contents.”[9]

The Court granted sanctions against 13 of the 96 plaintiffs for negligent and/or grossly negligent lapses in the preservation and collection of responsive electronic documents.[10] The three most significant lapses that the Court found were the failure of any of the 13 plaintiffs to issue litigation hold notices until after the PSLRA stay was lifted in 2007; the failure to identify and preserve sources of potentially responsive evidence, such as relevant backup tapes; and the failure to identify and collect responsive electronic documents.[11] The Court also observed that the plaintiffs filed declarations containing false and misleading statements, and that the declarants were both ill-prepared at deposition and generally had little or no personal knowledge about the preservation and collection efforts to which they had declared.[12]

Accordingly, the Court imposed monetary sanctions on each of these 13 plaintiffs.[13] The Court also found that 6 of the 13 plaintiffs were grossly negligent, and ordered a jury instruction that applies a burden-shifting test described below. The jury instruction permits the jury to: (i) hear and consider evidence pertaining to these plaintiffs’ evidence spoliation; and (ii) consider drawing an inference that the lost evidence would have been helpful to the defendants.[14]

Key Lessons from Pension Committee

There is, of course, significant additional detail and analysis in the lengthy Pension Committee decision which, we predict, is destined to become a landmark e-Discovery case. Its principal significance lies in the legal framework it provides for determining the appropriateness of e-Discovery-related sanctions. But it is also rich with observations from a jurist well-known for her contribution to e-Discovery standards through her highly-influential Zubulake opinions. We digest some of the most significant points below.
 

  • Presumption of Relevance and Prejudice; New Burden Shifting Test. Sanctions for evidence spoliation require proof that: (i) the spoliating party had control over the evidence and an obligation to preserve it at the time it was lost or destroyed; (ii) acted with a culpable state of mind; and (iii) the lost or destroyed evidence was not only relevant to the innocent party’s claims or defenses, but also that party suffered real prejudice as a result.[15] In Pension Committee, the Court observed that it is difficult for the moving party to prove the third element of relevance and prejudice because the potential relevance and value of missing evidence cannot easily be analyzed or demonstrated. It also observed that courts are permitted to presume relevance and prejudice after finding that “the spoliating party acted in bad faith or in a grossly negligent manner.”[16] Based on this presumption, the Court offered a new burden-shifting test: Once the innocent party has demonstrated that the preservation failure was the result of bad faith or gross negligence and, thus, may be presumed to have caused prejudice, the burden shifts to the spoliating party to rebut that presumption. [17] The spoliating party can do so, for example, by demonstrating that the innocent party has access to copies of the same evidence through other means, or that the evidence would not have been relevant to the innocent party’s claims or defenses. The Court noted that, if the spoliating party is able to rebut the presumption to a court’s satisfaction, then no jury instruction will be warranted, although a lesser sanction might still be required. On the other hand, if the spoliating party is not able to convince the court, then there are several potential jury instructions consistent with the foregoing burden-shifting analysis that a court might impose, depending on the degree of culpability.

  • “Negligence” versus “Gross Negligence.” In an effort to determine whether to apply the presumption of relevance and prejudice, the Court analyzed the discovery efforts of each of the 13 plaintiffs and decided whether those efforts were merely negligent (and thus did not invoke the presumption of prejudice) or grossly negligent (in which case the presumption did apply). The Court noted that every case is fact-dependent, and culpability determinations are evaluated under the “totality of the circumstances.”[18] That said, the Court made several important observations.

    First, today’s litigants have plenty of resources, including “years of judicial decisions,”[19] to guide them in satisfying their duty to preserve electronic evidence. Accordingly, the Court observed that any failure to take all appropriate measures to preserve and collect records is “surely negligent.” [20]

    Next, the Court concluded that the failure to follow certain steps prescribed by Zubulake is almost always likely to be the result of gross negligence which, according to the Court, is a sufficiently egregious or culpable departure from applicable evidence preservation standards to warrant imposition of sanctions. These include:


    • Failure to issue a written litigation hold. The failure to implement an evidence preservation hold “is likely to result in the destruction of relevant information” and thus is gross negligence.[21]

    • Failure to identify key players and preserve and collect their documents. The Court identified this preservation step, first explicated in Zubulake, as another example of gross negligence.[22] Most notably, the Court found that one plaintiff acted in a grossly negligent manner by delegating the search and collection efforts to an employee who had no prior experience collecting electronic records.[23]

    • Failure to cease the deletion of e-mail or other routine destruction of business records. In Pension Committee, Judge Scheindlin observed that a party is grossly negligent if it fails to “cease deletion of email” after a discovery duty is well-established.[24] This is a notable aspect of the decision. Courts have split on the issue whether disabling “auto-delete” policies on email systems is always necessary to comply with preservation obligations. Although it is not directly addressed in the opinion, Pension Committee appears to suggest that permitting the continued operation of an automatic deletion policy that could result in inadvertent purging of relevant email is perhaps alone persuasive evidence of a grossly negligent preservation failure regardless of the steps taken to instruct employees to routinely save emails from being purged.

    • Failure to collect the records of former, as well as current, employees that are in a party’s possession. The Court found that one of the individual plaintiffs engaged in gross negligence by failing to collect relevant documents and e-mail from a former employee who appears to have been a “key player.” In a footnote, the Court observed that the record did not reflect when the former employee stopped working. Regardless, the Court found that the individual plaintiff “may” have had an obligation to contact the former employee, and collect its records, “assuming it had the ‘practical ability’ to do so.”[25]

    • Failure to preserve backup tapes when they are the sole source of relevant information or relate to key players. The Court emphasized again here the requirements for backup tape retention discussed in Zubulake IV. The Court’s opinion also required certain plaintiffs with backup tapes to restore them and produce the relevant data at their own expense where such tapes were the sole source of relevant evidence then available.[26]

Practice Tips after Pension Committee

  • Issue hold notices as soon as the duty to preserve arises. Significantly, Pension Committee reiterates that the duty to issue a litigation hold may commence before the litigation, especially for plaintiffs who control its timing. The issues of when a pre-litigation hold must be issued and how broadly are neither subject to simple analysis nor perfectly clarified by this case or pre-existing authority. Parties contemplating filing a lawsuit are advised to consult with counsel regarding pre-lawsuit preservation obligations.

  • Suspend routine document destruction policies, including e-mail auto-delete, if they will cause deletion of potentially relevant documents. In light of this and other decisions, it may prove prudent to suspend automatic deletion policies that might lead to losses of relevant data after a duty to preserve arises. The accumulation of data that suspension of automatic deletion functions causes presents both cost and technical burdens that require analysis and technical expertise to resolve. In our view, Judge Scheindlin’s pronouncement that virtually any preservation failure is “surely negligent” is likely to encourage parties to take preservation out of the hands of busy employees and to utilize automatic archiving software or similar solutions to preserve relevant data, even if only on a temporary basis.[27]

  • Utilize defensible collection methods. Judge Scheindlin criticized certain plaintiffs for their “total reliance on the employee to search and select what the employee believed to be responsive records without any supervision from Counsel.”[28] Counsel in charge of document collection should familiarize themselves with the legal standards for electronic data collection and work closely with IT or other e-Discovery professionals to ensure that collection methods will stand up in court.

  • Enter into a custodian stipulation with opposing counsel. Pension Committee singles out a litigant’s failure to preserve and collect records from “key players” as grossly negligent conduct. [29] This pronouncement may incentivize litigants to dispute whether the appropriate “key players” were identified (because a failure to do so may result in harsher discovery sanctions). To prevent accusations that a party failed to identify key players, litigants should consider entering into an agreement early in the litigation that identifies the key players and discloses the search methods that will be used to cull their documents.

  • When defending electronic discovery efforts, choose qualified witnesses familiar with the technical aspects of preservation and collection. The Court found that the plaintiff-declarants in Pension Committee were uninformed as to what steps were taken and, as a result, submitted false and misleading declarations. To avoid falling into the same trap, counsel should take reasonable steps to ensure that witnesses are well-informed and well-prepared on the technical aspects of electronic discovery.

Notes:

[1] Opinion and Order, Pension Committee of the Univ. of Montreal Pension Plan, et al., v. Banc of America Securities, LLC, et al., No. 05-civ-9016 (SAS), January 11, 2010 (slip. op.).

[2] Id. at 81; see also Pension Committee (slip op.) at 33-34 n.82; Zubulake v. UBS Warburg LLC (“Zubulake V"), 229 F.R.D. 422 (S.D.N.Y. 2004).

[3] Id. at 1-4.

[4] Id.

[5] Id.

[6] Id. at 29-30.

[7] Id. at 30-31.

[8] Id.

[9] Id. at 32.

[10] Id. at 81-85.

[11] Id. at 35-37.

[12] Id. at 37-38.

[13] Id. at 83.

[14] Id. at 81-83.

[15] Id. at 14-15.

[16] Id. at 15-16.

[17] Id. at 18.

[18] See, e.g., id. at 65-66.

[19] Id. at 7.

[20] Id. at 8.

[21] Id. at 9, 24, 63.

[22] Id. at 10.

[23] Id. at 52.

[24] Id. at 24.

[25] Id. at 49 n. 124.

[26] Id.; see also Zubulake v. UBS Warburg LLC (“Zubulake IV”), 220 F.R.D. 212 (S.D.N.Y. 2003), at *4. [27] Pension Committee (slip op.) at 8.

[28] Id. at 28.

[29] Id. at 10.


 

Pension Committee — Update

UPDATE — On January 15, 2010, Judge Scheindlin withdrew her original Order and replaced it with an Amended Opinion and Order that revised certain of the language in the original Order. While the changes do not impact the court’s holdings, they are worthy of mention.

The Amended Order clarifies certain terminology from the original Order. For example, Judge Scheindlin revised her explanations of both the purpose for the burden-shifting test for establishing gross negligence (see the first bullet point under “Key Lessons from Pension Committee,” above) and its mode of operation. The substance of these points remains the same, but the language is now more direct.

The Amended Order’s most significant clarification concerns the need to preserve backup tapes pursuant to a litigation hold. Taken out of context, certain language in Judge Scheindlin’s original Order suggested that failing to preserve backup tapes for key players is, in and of itself, grossly negligent conduct. Her Amended Order establishes that backup tapes for key players must be segregated and preserved only “if such tapes are the sole source of relevant information (e.g., the active files of key players are no longer available).”[1] (Compare this with the last sub-bullet point under “Key Lessons from Pension Committee,” above, which is entitled, “Failure to preserve backup tapes when they are the sole source of relevant information or relate to key players.”)

Notes:

[1] Amended Order at 42 - 43 n.99.