Preservation Duties May Extend To Unallocated Space On Computer Hard Drives: Genger v. TR Investors, LLC, et al.

Thursday, September 1, 2011 - 01:00

Introduction

The recent decision by the Delaware Supreme Court in Genger v. TR Investors, LLC, et al. , No. 592, 2010, 2011 WL 2802832 (Del. Jul. 18, 2011), highlights the increasing level of sophistication with respect to identifying and preserving electronically stored information ("ESI") that parties embroiled in litigation are expected to achieve. In Genger , the Delaware Supreme Court upheld severe sanctions against a litigant who knowingly and intentionally spoliated evidence in contravention of a court order. Id . at *8. The twist on a situation that, at first, reads like any of a number of bad-faith spoliation cases is that the sanctions decision was driven by the destruction of unallocated space on a computer hard drive rather than the destruction of ordinary computer files. The Genger decision considers complex technical issues concerning ESI that is not readily accessible without the use of forensic software, and represents one of the few state courts of last resort to weigh in on an e-discovery sanctions issue. It suggests that courts nationwide are increasingly imposing a heightened level of sophistication and understanding when it comes to a litigant's e-discovery obligations.

What Is Unallocated Space?

Every computer hard drive has space that is "allocated," meaning that it is assigned by the operating system to the storage of specific programs, documents, applications and other data. So-called "unallocated space" is the portion of that hard drive in which no data has purposefully been stored - in other words, it could be considered "empty." However, computers use unallocated space for temporary storage of transient data. So, for example, when a Word document is opened, the unallocated space may house a version of that document until the unallocated space is overwritten. More importantly, after a computer file is intentionally "deleted" by a user, the data is typically not erased from the hard drive - rather, the computer simply marks the hard drive locations associated with that file as "unallocated" space, which makes the space available for the system to overwrite with new data in the future. Consequently, files that have been "deleted" but not yet overwritten with new data can in many instances be recovered using proper forensic technology. In Genger , however, the defendant intentionally "wiped" the unallocated space of a relevant hard drive - meaning it was affirmatively overwritten with blank or unintelligible data, obliterating any data not yet overwritten, and making it impossible to recover those files even using forensic methods. Id . at *5.

Background

The decision in Genger has its roots in a dispute for control of Trans-Resources, Inc. ("Trans-Resources"), a fertilizer and agricultural chemical manufacturer, between Arie Genger ("Genger"), Trans-Resource's original owner, and Plaintiff-Appellees, who are a Florida-based group of investors. Plaintiffs challenged the validity of certain stock transfers made by Genger, claiming that, pursuant to a Stockholders Agreement, they had a right of first-refusal for any such transferred stock and, as such, were in majority control of Trans-Resources.

As part of the contentious battle for ownership of Trans-Resources, the Plaintiffs filed an action under 8 Del. C. § 225 before the Delaware Chancery Court, asking for a determination that, as Trans-Resources majority stockholders, they were entitled to designate and elect a majority of the Trans-Resources board members (the "225 Proceeding"). Delaware Chancery Courts have jurisdiction over matters and causes in equity and the power to issue preliminary and permanent injunctions. During the 225 Proceeding, the Chancery Court issued a "Status Quo Order" that enjoined both parties from "tampering with or in any way disposing of any [Trans-Resources]-related documents, books or records." Although Genger and the Plaintiffs later settled their grievances over the board members, the Plaintiffs asked the Chancery Court to re-open the 225 Proceeding alleging that Genger violated the Status Quo Order. Trans-Resources, Inc. v. Genger , C.A. No. 3994-VCS, 2009 WL 4696062 (Del. Ch. Dec. 9, 2009). Specifically, Plaintiffs identified at least eight separate documents and/or e-mails that should have been found on the Trans-Resources server or Genger's work computer but were not. There was also evidence suggesting that the unallocated space of Genger's work computer had been wiped with a program called "SecureClean." Id . at *7, *12.

The Decision Below

In the decision below, Genger was described by the Chancery Court decision as an "'international man of mystery' [who] has high level contacts within the Israeli government for whom he performed sensitive tasks relating to Israel's national security." Id . at *5. As such, Genger was apparently worried about documents created and received that implicated Israel's national security and his personal documents, which were co-mingled with documents on Trans-Resources computers, accounts, and servers. Id . Allegedly, Trans-Resources' technology consultant approached Genger after the initial document review and voiced concerns that non-encrypted copies of personal files existed on the unallocated space of Trans-Resources' server and Genger's computer. Id . at *7. The consultant then suggested a wipe of all unallocated space using a program called "Secure Clean," to which Genger agreed. Id .

The Chancery Court found that Genger's wiping of the server and hard drive violated the Status Quo Order and that his failure to disclose the wiping to his attorneys was particularly stunning, writing that Genger and his consultant had "kept their furtive conduct secret." Id . at *8. The Chancery Court also found Genger's failure to seek advice from counsel, who had been charged with ensuring compliance with the Status Quo Order and the preservation of documents, particularly problematic. Id . Because it believed the consultant, and therefore Genger, knew that the unallocated space had not been imaged and that it likely contained a large amount of information that had not been reviewed, the Chancery Court concluded that the unallocated space was wiped "with the purpose not only of protecting [Genger's] non-TRI documents but also of narrowing the information base available to the [Plaintiffs]." Id . at *10.

Imposing severe sanctions, the Chancery Court: (i) increased Genger's burden of proof from a "preponderance of the evidence" to "clear and convincing evidence," (ii) ruled that Genger's uncorroborated testimony would not be permitted to establish any material fact, and (iii) awarded the Plaintiffs $750,000 in attorney's fees plus an additional $3.2 million to compensate the Plaintiffs for expenses stemming from investigating and litigating Genger's spoliation, including various fees by experts, technology consultants, and special masters. Id . at *19.

The Appeal

Genger appealed the Chancery Court opinion, arguing that the evidence was insufficient to show that relevant documents were destroyed and that the Status Quo Order did not expressly require preservation of unallocated space. Genger , 2011 WL 2802832, at *7. Genger also made the policy argument that requiring a litigant to preserve unallocated space on any storage device that may have relevant ESI would be impossibly burdensome to that litigant - effectively requiring the party to refrain from using its computers entirely. Id.

In finding that the Chancery Court did not abuse its discretion or commit any erroneous findings of law or fact, the Supreme Court held that the Status Quo Order required the preservation of unallocated space (which may or may not contain retrievable data) even though that order only referred to the preservation of "documents, books or records." Id . at *7. The Supreme Court additionally addressed Genger's policy argument, writing it did "not read the Court of Chancery's Spoliation Opinion to hold that as a matter of routine document-retention procedures, a computer hard drive's unallocated free space must always be preserved." Id . Instead, it stressed that its affirmation of the Chancery Court's opinion was case specific "where a party is found intentionally to have taken affirmative steps to destroy or conceal information to prevent its discovery at a time that party is under an affirmative obligation to preserve that information." Id . at *8.

The Supreme Court seemingly focused on the fact that "Genger, despite knowing that he had a duty to preserve documents, intentionally took affirmative actions to destroy several relevant documents on his work computer." Id . at *7. Genger was not so much sanctioned for failing to preserve his unallocated free space, but rather for taking affirmative steps to destroy it. In fact, the Supreme Court expressly contemplates a scenario where "the outcome perhaps might be different if Trans-Resources had a data retention policy" that provided for regular wiping of unallocated space for business purposes.

Analysis

The Supreme Court's opinion is striking because it raises the issue of whether files that are not visible or accessible to an ordinary computer user, located in the "unallocated space" that many litigants are unaware of, may fall subject to preservation obligations once litigation is reasonably anticipated. Although the opinion is expressly limited to a specific fact pattern indicative of bad faith, Delaware's highest court appears to be signaling that litigants should become versed in the technical intricacies of e-discovery and, specifically, expects parties to meet and confer about the preservation of unallocated space during initial stages of discovery.

This decision suggests that litigants in Delaware may be expected by adversaries and the courts to preserve a broader set of data than is typically the case. Application of principles articulated in Genger is likely to be highly fact specific and potentially inconsistent. Indeed, the Supreme Court noted that non-Delaware state courts "have differed in their approaches to determining whether destruction of evidence due to routine document destruction policies warrants sanctions such as an adverse inference instruction." Id . at *8 n.49. For example, companies doing business in New York may wish to review their policies in light of R.F.M.A.S., Inc. v. So , 271 F.R.D. 13, 24 (S.D.N.Y. 2010), which found that "failure to suspend 'any routine document destruction or other process . . . that might result in the destruction of potentially relevant evidence' may result in sanction." Id .

The Genger decision is in line with decisions across the country suggesting that parties are well-advised to retain and confer with counsel familiar with e-discovery issues at an early stage once the prospect of litigation arises. The meet-and-confer process presents an early opportunity for litigants to gain a tactical advantage in virtually any litigation, with substantial cost savings and an opportunity to defuse incipient disputes. Moreover, a litigant who expects to be requesting electronic discovery from an adversary should consider whether unallocated space may contain relevant ESI warranting a preservation request and effectively-tailored discovery requests. The Genger decision also suggests that, even before litigation arises, corporations should be thoughtful in their security and deletion policies concerning sources of ESI where such policies could impact hidden or inaccessible data storage locations.

Brendan M. Schulman is E-Discovery Counsel at Kramer Levin Naftalis & Frankel LLP. He advises clients on the preservation, collection, processing, review and production of electronic information, with an emphasis on early case assessment and other cost-effective and defensible strategies. Lisa Neunder, an Associate, focuses primarily on general employment and general commercial litigation.

Please email the authors at bschulman@kramerlevin.com or lneunder@kramerlevin.com with questions about this article.