eDIGital Newsletter - December 2010

In this inaugural issue of Seyfarth eDIGital, the official newsletter of Seyfarth Shaw’s eDiscovery and Information Governance practice group, we will discuss the impact and implications of two significant eDiscovery decisions issued by Magistrate Judge Paul Grimm in the District of Maryland, both of which stemmed from the same underlying case.  The first decision, Victor Stanley Inc. v. Creative Pipe Inc., 250 F.R.D. 251 (2008) (“Victor Stanley I”), is widely regarded as the seminal opinion on the perils associated with relying upon search terms, or keywords, to conduct a privilege review.  We will also discuss Federal Rule of Evidence (“FRE”) 502, which was signed into law just a few months later, in September 2008.  Despite the fact that more than two years have elapsed since Victor Stanley I was decided and FRE 502 was enacted, recent decisions—including Mt. Hawley Ins. Co. v. Felman Prod., Inc. v. Indus. Risk Insurers, No. 3:09-CV-00481, 2010 WL 1990555 (S.D. W. Va. May 18, 2010) (“Mt. Hawley”)—make clear that too few litigants have incorporated their teachings into their eDiscovery strategy.

Magistrate Judge Grimm revisited the same parties to the Victor Stanley I decision in Victor Stanley, Inc. v. Creative Pipe, Inc., No. MJG-06-2662, 2010 WL 3703696 (D. Md. Sept. 9, 2010) (“Victor Stanley II”), in order to confront what he described as “the single most egregious example of spoliation that [he] ha[s] encountered in any case that [he] ha[s] handled or in any case described in the legion of spoliation cases [he] ha[s] read in nearly fourteen years on the bench.” Id. at *60.  Not only did the court grant the plaintiff default judgment on the primary count, but defendant Mark Pappas was found in contempt of court and sentenced to two years imprisonment unless he paid the fees and costs that were awarded.¹  In arriving at that sanction, Magistrate Judge Grimm took the opportunity to provide detailed, cross-jurisdictional guidance on how to conduct a proper spoliation analysis.  Accordingly, Victor Stanley II is likely to become as influential as its predecessor in guiding courts and litigants alike on how to navigate the eDiscovery waters without running aground.

Privilege Reviews Since Victor Stanley I

In Victor Stanley I, Magistrate Judge Grimm considered the circumstances under which an inadvertent production of 165 privileged documents should result in a waiver of privilege.  There, the defendants used approximately 70 keywords in an effort to identify those documents that were potentially privileged and required further review. However, not all of the documents at issue were in text-searchable format, and those that were not capable of being searched were only reviewed if the titles of the documents suggested that they might be privileged.  The record before the court was unclear as to whether the 165 inadvertently produced documents were from the text-searchable or non-text-searchable tranche.  Regardless, the court held that the defendants “failed to demonstrate that the keyword search they performed on the text-searchable [electronically stored information] was reasonable,” id. at 262, and that under either the strict or intermediate standard, “the defendants waived any privilege or work-product protection for the 165 documents at issue by disclosing them to the plaintiff.” Id. at 267-68.  Among the defendants’ many deficiencies in establishing the reasonableness of their precautions, the court noted that they failed to provide information regarding:

• the keywords used;
• the rationale for their selection;
• the qualifications of the defendant and his attorneys to design an effective and reliable search and information retrieval method;
• whether the search was a simple keyword search, or a more sophisticated one, such as one employing Boolean proximity operators; or
• whether they analyzed the results of the search to assess its reliability, appropriateness for the task, and the quality of its implementation.

Id. at 259-60 (footnote omitted).  The court then cautioned parties that exploitation of keyword search and related technologies requires the “utmost care” and “careful advance planning” followed by “quality assurance” testing to avoid a finding of waiver. Indeed, the court stated categorically that “the only prudent way to test the reliability of the keyword search is to perform some appropriate sampling of the documents determined to be privileged and those determined not to be in order to arrive at a comfort level that the categories are neither over-inclusive nor under-inclusive.” Id. at 257.  Finally, Magistrate Judge Grimm specifically noted that “compliance with the Sedona Conference Best Practices for use of search and information retrieval will go a long way towards convincing the court that the method chosen was reasonable and reliable, which, in jurisdictions that have adopted the intermediate test for assessing privilege waiver based on inadvertent production, may very well prevent a finding that the privilege or work-product protection was waived.” Id. at 262.  The specific Sedona Conference Practice Points cited by the court are as follows:

Practice Point 3: The choice of a specific search and retrieval method will be highly dependent on the specific legal context in which it is to be employed.

Practice Point 4: Parties should perform due diligence in choosing a particular information retrieval product or service from a vendor.

Practice Point 5: The use of search and information retrieval tools does not guarantee that all responsive documents will be identified in large data collections, due to characteristics of human language. Moreover, differing search methods may produce differing results, subject to a measure of statistical variation inherent in the science of information retrieval.

Practice Point 6: Parties should make a good faith attempt to collaborate on the use of particular search and information retrieval methods, tools and protocols (including as to keywords, concepts, and other types of search parameters).

Practice Point 7: Parties should expect that their choice of search methodology will need to be explained, either formally or informally, in subsequent legal contexts (including in depositions, evidentiary proceedings, and trials).

Victor Stanley I, 250 F.R.D. at 262 (quoting The Sedona Conference Best Practices Commentary on the Use of Search & Information Retrieval Methods in E-Discovery, 8 Sedona Conf. J. 189, 194-95, 201-02).

In a prelude to FRE 502, the Victor Stanley I court observed that “had [the defendants] not voluntarily abandoned their request for a court-approved non-waiver agreement, they would have been protected from waiver.” Id. at 262.  Less than four months later, FRE 502 was signed into law, codifying Magistrate Judge Grimm’s recommendation concerning court-approved agreements.  The Statement of Congressional Intent accompanying FRE 502(d) confirmed that “this subdivision is designed to enable a court to enter an order . . . that will allow the parties to conduct and respond to discovery expeditiously, without the need for exhaustive pre-production privilege reviews, while still preserving each party’s right to assert the privilege to preclude use in litigation of information disclosed in such discovery.”  (Statement of Congressional Intent Regarding Rule 502 of the Federal Rules of Evidence.)

Recent Case Law

Despite the warnings contained in Victor Stanley I and the roadmap provided by FRE 502 to avoid inadvertent waiver, litigants still find themselves in the unenviable position of having waived privilege due to poor technological planning and oversight coupled with inadequate (or nonexistent) protective orders.  In Mt. Hawley, decided earlier this year, the plaintiff inadvertently produced 981 privileged documents, and ultimately tried to recall 377 of them.  Most (but not necessarily all) of these documents were produced as a result of an obscure technological error in which one of 13 Concordance database files suffered from an incomplete index that failed to identify documents containing potentially privileged search terms.  While the parties had executed a stipulation governing the discovery of electronically stored information ("ESI"), it was never incorporated into a court order, and more importantly, it did not include any language expressly stating that an inadvertent production would not constitute a waiver.  In fact, it included language stating just the opposite, that “the return of an Inadvertently Produced Document does not preclude the receiving party from disagreeing with the designation of the document as privileged or redacted and re-produced and bringing a Motion to Compel its production pursuant to the Federal Rules of Civil Procedure.” Id. at *4.  As a result, the stipulation as drafted provided no protection to the plaintiff under FRE 502(d)-(e).

In applying the same five-factor test cited in Victor Stanley I and recited in the advisory committee notes accompanying FRE 502, the court ruled that “the precautions to prevent inadvertent disclosure were not reasonable” because, as warned in Victor Stanley, "the failure to test the reliability of keyword searches by appropriate sampling is imprudent.” Id. at *13.  The court also noted that the sheer number of privileged documents that were disclosed, “more than double the number discussed in Victor Stanley, . . . underscores the lack of care taken in the review process.” Id.  While commentators have called several aspects of the court’s reasoning into question—specifically its undue focus on the lack of sampling (even though sampling would have been unlikely to detect the index error) and the absolute number of privileged documents produced (even though on a percentage basis the inadvertent production was quite small)—the district court judge denied all of the objections that were subsequently filed by the plaintiff, so the opinion remains good law.

Key Takeaways

The preceding discussion of Victor Stanley I, FRE 502, and Mt. Hawley imparts two primary lessons.  First, it should serve as a strong motivation to outside counsel to push for the inclusion of clear non-waiver language in nearly all confidentiality and protective orders.  Such language should reference FRE 502 and should either include a blanket non-waiver claw-back clause irrespective of the precautions taken or, alternatively, should set forth a process that, when followed, satisfies the three elements outlined in FRE 502(b) to constitute an inadvertent production for which no waiver results.  If opposing counsel refuses to agree, it may very well be worth moving the court unilaterally for such an order.  Engaging in a document production without the safety net of a claw-back agreement inserts unnecessary risk, and attendant cost, into the process.

Second, these cases should counsel litigants and lawyers to tread carefully when it comes to relying entirely upon technology to shield privileged documents from production.  While keywords, domain name searches, and deduplication technology can go a long way towards mitigating the risk of an inadvertent production, they will never eliminate that risk.  Even for parties operating with a claw-back agreement in place, once privileged documents have been received and reviewed by your adversary, the damage is often done, even absent waiver.  While sampling by its very nature is unlikely to ferret out every last privileged document before it is produced, courts have nonetheless placed great emphasis on the practice, and litigants should do likewise, ideally with some accompanying statistical analysis supporting the sampling approach taken.  In order to guard against the sort of index error that occurred in Mt. Hawley, it may be prudent to import the proposed document production into a different environment for final sampling before actually providing the media to opposing counsel.

Spoliation Sanctions Under Victor Stanley II²

In Victor Stanley II, the court identified eight discrete preservation failures, each of which “demonstrate[d] intentional misconduct done with the purpose of concealing or destroying evidence.” Id.  For instance, the defendants failed to implement a litigation hold, failed to preserve files and emails even after the plaintiff demanded preservation, and intentionally deleted ESI despite repeated admonitions by the court of the need to preserve relevant materials and produce them to the plaintiff. Id. at *2.  The court ultimately granted the plaintiff default judgment as to liability on the primary cause of action (copyright infringement of furniture designs), imposed a permanent injunction on that claim, awarded the plaintiff attorney’s fees and costs allocable to spoliation, and most notably, found the defendant Mark Pappas in civil contempt of court, punishable by two years in prison unless he paid the plaintiff the fees and costs awarded.³

Sanctions Analysis

After bemoaning the “lack of a uniform national standard governing when the duty to preserve potentially relevant evidence commences, the level of culpability required to justify sanctions, the nature and severity of appropriate sanctions, and the scope of the duty to preserve evidence” (id. at *17), the court went so far as to append to the opinion a 12-page chart delineating the preservation and spoliation standards in each judicial circuit.  The framework the court applied to evaluate the appropriateness and level of sanctions was as follows:

First, there must be a duty to preserve evidence and a breach of that duty.  It is well established that the duty to preserve arises as soon as litigation is reasonably anticipated and that the duty extends to documents in a party’s possession, custody or control, but the definition of “control” varies by circuit.

Second, there must be some level of fault. Once again, the degree of culpability—ordinary negligence, gross negligence, willfulness, or bad faith—varies by circuit.

Third, the lost evidence must be relevant and the loss must be prejudicial to the party alleging spoliation.  Evidence is relevant if “a reasonable trier of fact could conclude that the lost evidence would have supported the claims or defenses of the party that sought it.” Id. at *34.  Prejudice exists when “the party claiming spoliation cannot present ‘evidence essential to its underlying claim.’” Id. at *35.

Finally, assuming the first three elements have been satisfied, the extent of prejudice and degree of culpability will dictate the proper sanction, with the proviso that “the court must ‘impose the least harsh sanction that can provide an adequate remedy.’” Id. at *37.  While the case-dispositive sanctions of dismissal or default judgment are reserved for the most severe instances of spoliation, the less draconian adverse inference jury instruction is oftentimes equally damaging in practice.  Additionally, a party can be found in contempt of court under Federal Rule of Civil Procedure 37(b)(2)(A)(vii) and pursuant to a court’s inherent authority if it is established, by clear and convincing evidence, that the party had actual or constructive knowledge of a court order and knowingly violated it to the detriment of the non-moving party. Id. at *41.

Key Takeaways

The opinion is instructive for both lawyers and litigants in a number of additional respects.  For instance, while the fact pattern presented did not require the court to delve too deeply into these issues, the court reaffirmed the need to consider both reasonableness and proportionality in evaluating parties’ document preservation and production efforts.  Furthermore, the court makes clear that a party cannot escape sanctions by pointing a finger at its outside counsel, explaining that “insofar as Plaintiff alleges spoliation by the attorneys who represented Defendants earlier in this litigation, Defendants’ previous attorneys acted as Defendants’ agents” and “therefore, any such spoliation is attributable to Defendants.” Id. at *17 n.23.  It is thus critical that companies retain outside counsel with a thorough understanding of the eDiscovery landscape and that parties maintain an open line of communication with their counsel on all eDiscovery matters throughout the lifecycle of a case.

For those who litigate in the Southern District of New York, the court repeatedly emphasized the potential “chain reaction” that could take place in light of that district’s willingness to presume relevance and prejudice when a party exhibits gross negligence, paired with the finding in Judge Scheindlin’s seminal Pension Committee decision that a party’s failure to issue a written litigation hold notice automatically constitutes gross negligence.  See id. at *38 n.37; Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities LLC, et al., 685 F. Supp. 2d 456, 471 (S.D.N.Y. 2010).  In short, a party that neglects to circulate a hold notice may be susceptible to sanctions, at least in the Southern District of New York, even absent any factual showing that relevant evidence was lost or that the loss prejudiced the moving party.

The only overtly troubling component of the opinion was its rumination that the actions of “a sympathetic though negligent party” may be more likely to warrant case-dispositive sanctions than a party guilty of “intentionally egregious conduct” where the sympathetic party’s conduct happens to result in greater prejudice.  See id. at *27.  This section of the opinion runs counter to the notion that litigants who proceed in good faith are generally spared severe sanctions, and it will be important to monitor future decisions to see how much weight courts place on this language.

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¹ The district court judge ultimately declined to adopt the contempt and prison sentence portion of Magistrate Judge Grimm’s decision, deeming it premature to find the defendant in contempt prior to any actual failure to pay the fees and costs awarded. Victor Stanley Inc. v. Creative Pipe Inc., No. 8:06-cv-02662-MJG, slip op. at 1 (D. Md. Nov. 1, 2010). ² This section was adapted from a September 30, 2010 Management Alert entitled, “Victor Stanley II - From Spoliation to the Slammer.” ³As discussed above, the contempt finding was not adopted by the district court judge.