Parties’ discovery obligations in potential class and collective action cases recently became even more complicated. On February 3, 2012, U.S. District Judge Colleen McMahon of the U.S. District Court for the Southern District of New York ruled against KPMG’s objections to the discovery order U.S. Magistrate Judge James L. Cott entered last October in Pippins v. KPMG. The ruling is particularly noteworthy since KPMG will now have to preserve a large amount of information for potential plaintiffs who may never join the lawsuit – at such a cost that it may, as KPMG has argued, “swallow the amount at stake.”
In the lawsuit, filed in January 2011, several former KPMG employees sued on behalf of a putative class of the Big Four accounting firms’ Audit Associates, claiming KPMG improperly classified them as exempt from the requirement to pay overtime under the federal Fair Labor Standards Act (FLSA) and New York state law. However, the firm claims the associates were exempt under the exception to overtime for executive, administrative, or professional employees whose work involves discretion and independent judgment “with respect to matters of significance.”
Since the plaintiffs have sued under both federal and state law, differing requirements govern the claims. The FLSA allows collective actions, but not class actions, meaning that employees interested in joining the lawsuit must indicate their consent in writing to opt in as plaintiffs and file their consent with the court. The class of potential plaintiffs is at least 7,500 current and former KPMG employees whose work spans the years from 2008 to 2011. On the other hand, the New York state law mirrors the opt-out procedures of class actions under Rule 23 of the Federal Rules of Civil Procedure (FRCP). The state claims involve at least 1,500 current and former employees who worked for KPMG from 2005 to 2011.
On April 6, 2011, the plaintiffs filed a motion seeking conditional certification of a collective action under the FLSA and requesting contact information for current and former Audit Associates. (To date, they have not pursued certification of a class under New York state law.) On April 15, Judge McMahon stayed discovery until she decided the plaintiffs’ motion for conditional certification. Subsequently, KPMG asked for clarification of its preservation requirements during the stay. Judge McMahon referred the issue to Magistrate Judge Cott in May.
In August 2011, after the parties failed to negotiate a resolution to the preservation dispute, KPMG filed a motion seeking a protective order with Magistrate Judge Cott. In the motion, KPMG sought to limit the scope of its preservation obligations relating to the hard drives of thousands of former employees who might fall within the scope of the pending collective action while the court was considering whether to certify a class. The plaintiffs claimed the hard drives contained information that would establish the length of their working hours as well as the type of work they performed during those hours.
In its motion, KPMG asked Magistrate Judge Cott to permit it to retain a random sample of 100 of the hard drives or to require the plaintiffs to share the costs of preserving any more than 100 hard drives. The firm argued that its duty to preserve evidence was limited to the “key players” in the litigation – the named plaintiffs – not every potential class member. The plaintiffs disagreed, arguing that proportionality did not apply to the duty to preserve. Since the plaintiffs had not had an opportunity to examine any of the hard drives – KPMG had rejected the plaintiffs’ request to review just five hard drives – they could not assess the value of their content to the litigation.
On October 7, 2011, Judge Cott denied KPMG’s motion, finding that the drives were likely to contain relevant information – especially in light of KPMG’s failure to produce even one drive for assessment. Therefore, he ordered the company to preserve all hard drives for all potential class members until one of two things occurred: (1) Judge McMahon ruled otherwise or (2) the parties agreed to a sampling methodology. The magistrate judge also refused to shift the burden of the preservation costs to the plaintiffs.
KPMG appealed and asked Judge McMahon to set aside the magistrate judge’s order on several grounds, including that the magistrate judge’s definition of “key player” as any potential plaintiff was too broad and that the magistrate judge failed to consider whether the cost of requiring KPMG to preserve the hard drives was proportional to the benefit to be derived from the hard drives.
Judge McMahon first tried to resolve the matter on January 3, 2012, when she conditionally certified the class of Audit Associates. In this ruling, she gave the parties a hint: she asked whether her order “obviates the parties’ pending discovery dispute.” Neither party took the bait; instead, they argued that the dispute was very much alive.
As a result, in her February 3, 2012 opinion, Judge McMahon chastised the parties for failing to take her hint. She flatly asserted that “when the parties told me the order conditionally certifying the collective action did not moot their dispute, they were wrong.” According to Judge McMahon, the magistrate judge’s order “preserve[d] the status quo” by requiring KPMG to retain the hard drives for all potential class members “until the smoke cleared on the issue of conditional certification.” Since she had entered the certification order, her affirmation of the magistrate’s order was “a moot point, since the moment has come when KPMG is free to renew its application for a protective order.”
Judge McMahon also took KPMG to task for “hiding behind the stay of discovery,” using the “discovery stay as a shield,” and failing to cooperate either by allowing the plaintiffs to inspect the contents of a small sample of the hard drives or by describing the contents of those drives.
The opinion criticized the parties’ (and the magistrate’s) failure to communicate with the court:
Neither side bothered to ask me whether, in my opinion, the stay prevented KPMG from producing any hard drives for inspection, so that negotiations over how to carry out a procedure that both sides agreed would be beneficial (sampling) could proceed in a meaningful way. Had I been contacted, I would have immediately ordered KPMG to produce a small number of hard drives so that Plaintiffs’ counsel could peruse them, and that would have been the end of the matter. In the future, if the parties or the learned Magistrate have any questions about the scope of any order of this Court – especially when the order is being relied on to block meaningful case management – I suggest that they save a lot of time and expense by asking me for guidance.
Judge McMahon’s opinion offers a critical insight into proportionality. Unlike her colleagues in the Southern District, Judge McMahon observed that “preservation and production are necessarily interrelated. The application of the proportionality principle to preservation flows from the existence of the principle under the Federal Rules of Civil Procedure.” But even though she sided with KPMG that “proportionality is at the very least relevant to a decision on a motion for protective order, even if not determinative of it,” she could not apply her analysis to the instant case. According to Judge McMahon, KPMG’s argument seeking a reversal of the magistrate judge’s ruling “smacks of chutzpah”: neither she nor the magistrate could “balance the costs and benefits of preservation when KPMG refused to cooperate with that analysis by providing the very item that would, if examined, demonstrate whether there was any benefit at all to preservation.” She further commented on the precarious nature of KPMG’s position:
KPMG cannot simultaneously demand that the Court analyze how long every Audit Associate worked and what every Audit Associate did and also ask the Court to sanction the destruction of what is probably the single best source of that information.
In short, KPMG is hoist on its own petard.
Ultimately, because KPMG refused to agree to the plaintiffs’ request to review five hard drives to “determine whether this issue is even worth fighting about,” the company now has to, according to its estimate, spend $1.5 million or more to preserve at least 2,500 hard drives of all “key players” – nonparties that may have information a disclosing party can use to support its claims or defenses – unless it can reach an agreement with the plaintiffs on sampling. Judge McMahon ruled that every current and former Audit Associate who might opt in to the lawsuit “is a potential plaintiff”: the plaintiffs’ position that only the named plaintiffs were parties was “nonsense.” Citing the seminal cases Zubulake v. UBS Warburg LLC and Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, Judge McMahon ruled that “the duty to preserve all relevant information for ‘key players’ is triggered when a party ‘reasonably anticipates litigation.’” Therefore, she concluded that KPMG should “‘reasonably anticipate’ that every Audit Associate who will be receiving opt-in notice is a potential plaintiff in this action.”
Undoubtedly, Judge McMahon’s ruling will contribute to the furor over whether amendments to the FRCP are necessary to clarify parties’ preservation burdens. Based on her decision, companies will now have to be even more cautious when notified of lawsuits with the potential to involve class claims. Since parties will have to preserve electronically stored information (ESI) for every potential class member who may opt in to a lawsuit, it may become more difficult for companies to justify the costs of preserving (and later producing) the ESI required to defend claims on their merits, therefore giving plaintiffs greater leverage in settlement discussions. Notably, both judges supported the idea of sampling, so parties should consider opportunities to sample large quantities of ESI as a way to potentially limit their preservation burdens.
The ruling also serves to remind counsel to confirm that their company has a solid records management program. If your organization does not, now is the time to implement one. Review your company’s policy to ensure it allows the destruction of data in line with applicable law, regulations and best practices for your industry. In addition, monitor how well employees are complying with the policy: audit their laptops and smartphones as well as their office computers. Finally, be sure the policy includes the data of former employees within its scope.
Jon Resnick is an attorney and the global vice president of sales, marketing and consulting at Applied Discovery. In this role, Mr. Resnick oversees the industry’s most respected client development and consulting organizations. In addition, Mr. Resnick has primary responsibility for all marketing and product management functions for Applied Discovery’s strategic outside partner channel.