The Southern District of New York Lays Down the Law on Discovery Misconduct
Six years after issuing the landmark Zubulake decisions (Zubulake v. UBS Warbug LLC, 220 F.R.D. 212 (2003); Zubulake v. UBS Warbug LLC, 229 F.R.D. 422 (2004)), Judge Shira A. Scheindlin, of the United States District Court for the Southern District of New York, delivered another important opinion clearly defining the responsibilities of litigants and counsel during discovery. Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010). In a lengthy, yet thoughtful and well-reasoned decision, Judge Scheindlin provides an analytical framework for addressing discovery misconduct. Much like her Zubulake opinions, which became the electronic discovery standard for courts across the country, Pension Committee will likely become the standard for courts analyzing discovery misconduct. A copy of the Pension Committee opinion can be downloaded here.
In Pension Committee, a group of investors brought suit seeking to recover losses of $550 million from the liquidation of two offshore hedge funds. In October 2007, several defendants claimed that substantial gaps were found in plaintiffs’ document production. In the hopes of clarifying plaintiffs’ efforts regarding their document production, depositions were taken and declarations were submitted. Following the close of discovery, the defendants moved for sanctions, alleging that plaintiffs failed to preserve and produce documents, including those stored electronically, and submitted false and misleading declarations regarding their document collection and preservation efforts.
It is important to note that this is not a case where litigants purposefully destroyed evidence. Rather, documents were either lost or destroyed when plaintiffs failed to set up timely, written litigation holds and “engaged in careless and indifferent collection efforts after the duty to preserve arose.” In determining whether sanctions should be imposed for this conduct, and if so, what level of sanctions should be imposed, Judge Scheindlin outlined four factors which must be carefully reviewed and analyzed: 1.) the litigant’s level of culpability, 2.) the interplay between the duty to preserve evidence and the spoliation of evidence, 3.) which party should bear the burden of proving that evidence has been lost or destroyed, and 4.) the appropriate remedy for the harm caused by the spoliation. Pension Committee, 2010 WL 184312 at *2.
1.) Litigant’s Level of Culpability
Judge Scheindlin explained that to determine a litigant’s level of culpability, a court must determine whether a litigant’s discovery conduct was acceptable or whether it was negligent, grossly negligent, or willful. She then develops a chronological list of discovery abuses and their corresponding culpability level, stating:
[T]he first steps in any discovery effort is the preservation of relevant information. A failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, and, depending on the circumstances, may be grossly negligent or willful. For example, the intentional destruction of relevant records, either paper or electronic, after the duty has attached, is willful. 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.
[F]ailure to collect records – either paper or electronic – form key players constitutes gross negligence or willfulness as does the destruction of email or certain backup tapes after the duty to preserve has attached. By 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. Similarly, the failure to take all appropriate measures to preserve [electronically stored information] likely falls in the negligence category.
Id. at *3. The court cautions that these examples are not meant as a definitive list, but rather, “each case will turn on its own facts and the varieties of efforts and failures is infinite.” Id.
2.) The Duty to Preserve and Spoliation
Spoliation is the destruction or material alteration of evidence or the failure to preserve property to be used as evidence in pending or reasonably foreseeable litigation. 2010 WL 184312 at *4. Scheindlin emphasizes that the duty to preserve evidence arises when a party reasonably anticipates litigation. In fact, Scheindlin reiterates this point several times, writing that “[by] now, it should be abundantly clear that … a failure to preserve records – paper or electronic – and to search in the right places for those records, will inevitably result in the spoliation of evidence.” She continues that, in regards to the interplay between the duty to preserve and spoliation, case law makes it “crystal clear” that when a breach of the duty to preserve leads to the spoliation of evidence, courts may impose sanctions. Id.
3.) Burdens of Proof
Significantly, Scheindlin notes that the burden for proving that evidence has been lost or destroyed varies depending on the severity of the sanction to be imposed. For less severe sanctions (e.g., fines, cost-shifting), the analysis “focuses more on the conduct of the spoliating party rather than on whether documents were lost, and if documents were lost, whether those documents were relevant and resulted in prejudice to the innocent party.” 2010 WL 184312 at *4. For more severe sanctions (e.g., dismissal, preclusion, imposition of an adverse inference), the court, in addition to considering the conduct of the spoliating party, focuses on whether any missing evidence was relevant and whether the innocent party has suffered prejudice as a result of the loss of evidence. Id.
Ultimately, the innocent party must prove that the spoliating party 1.) had control over the evidence and an obligation to preserve it at the time of destruction or loss; 2.) acted with a culpable state of mind upon destroying or losing the evidence; and that 3) the missing evidence is relevant to the innocent party’s claim or defense. 2010 WL 184312 at *5. The court adds: “It is not enough for the innocent party to show that the destroyed evidence would have been responsive to a document request. The innocent party must also show that the evidence would have been helpful in proving its claims or defenses – i.e., that the innocent party is prejudiced without that evidence.” Id. Relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligent manner.
To further balance the burden of an innocent party trying to prove how documents they have never seen are relevant to their claim or defense, Scheindlin employs a burden-shifting test, specifically, when the spoliating party’s conduct is sufficiently egregious, the burden then shifts to the spoliating party to rebut a presumption of relevance and prejudice.
4.) Appropriate Remedy
The trial court has broad discretion to determine an appropriate sanction for spoliation if any, and it is assessed on a case-by-case basis. Appropriate sanctions should deter the parties from engaging in spoliation, place the risk of an erroneous judgment on the party who wrongfully created the risk, and restore the prejudiced party to the position it would have been in absent the wrongful destruction of evidence. 2010 WL 184312 at *6. A court should always impose the least harsh sanction that can provide an adequate remedy, including, from least harsh to most harsh: further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of a default judgment or dismissal. Id.
Although Judge Scheindlin does not necessarily make new law with her Pension Committee opinion, she thoughtfully articulates a framework for analyzing discovery misconduct. She also clearly defines the discovery and production responsibilities of litigants and their attorneys and emphasizes the importance of initiating timely and effective litigation holds.