Discovery Of Electronic Information: The Scylla Of Excessive Cost And The Charybdis Of Potential Sanctions

Sunday, October 1, 2006 - 01:00

The discovery of electronic information, the extraordinary burdens and costs sometimes associated with such discovery, and the sanctions imposed in recent cases upon litigants who failed to comply with electronic discovery obligations are hot topics in the litigation world. It is not hard to see why.

E-mail messages and documents salvaged from the electronic dust-bin have featured prominently in high profile cases ranging from Martha Stewart to Enron. The discovery of electronic information is a necessity as more than ninety percent of all new business documents are created in electronic form. In many instances, relevant information may exist only in electronic form, such as e-mail messages or spreadsheets. At the same time, litigants have found that electronic discovery - particularly the recovery of deleted e-mail or files from backup tapes or hard drives - may entail extraordinary burden and expense. Ignoring electronic discovery obligations is not an option, however, particularly in light of the much-reported Morgan Stanley litigation,1 in which court sanctions led to a jury award of more than $1.4 billion, and other recent cases involving sanctions. This article will offer some observations that may be useful in navigating these treacherous waters.

Sanctions

Much of the current focus on electronic discovery derives from widely-reported cases imposing sanctions on litigants for failing to comply with their discovery obligations. Many counsel will remember last year's Morgan Stanley decisions in which Morgan Stanley's alleged discovery abuses culminated in a $1.4 billion jury award against Morgan Stanley. See Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI, 2005 WL 679071 (Fla. Cir. Ct. Mar. 1, 2005) (" Morgan Stanley I"); Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI, 2005 WL 674885 (Fla. Cir. Ct. Mar. 23, 2005) ("Morgan Stanley II").

In that case, the court required Morgan Stanley to search certain e-mail backup tapes and e-mails to respond to document requests propounded by the plaintiff (Coleman), and further ordered Morgan Stanley to certify its compliance with the discovery order. Morgan Stanley I, 2006 WL 679071 at *1-4. According to findings made by the Court, Morgan Stanley falsely certified that it had complied with its discovery obligations even though its review of electronic information was incomplete. Coleman asked the court to issue an adverse inference instruction to the jury that the contents of the e-mails that Morgan Stanley failed to produce were harmful to Morgan Stanley. The court agreed, finding that Morgan Stanley's discovery failures were a "willful and a gross abuse of its discovery obligations." Id. at *1, 5.

Within weeks of that order, Coleman brought a motion for entry of a default judgment, asserting that Morgan Stanley's discovery abuses were continuing. Morgan Stanley II, 2005 WL 674885 at *1. Finding once again that Morgan Stanley had violated discovery orders and had chosen to conceal the nature and extent of its violations, the court granted partial default judgment to Coleman. Id. at *9. Ultimately, the jury returned verdicts totaling more than $1.4 billion against Morgan Stanley. See Stephen Taub, Morgan Stanley's Legal Bill Hits $1.4B, CFO.com (May 20, 2005).

In more recent cases, litigants have relied upon the Morgan Stanley rulings to seek default judgments and/or adverse inference instructions as sanctions for alleged e-discovery abuses. See, e.g., Krumwiede v. Brighton Assoc., No. 05 C 3003, 2006 WL 1308629, at * 11. (N.D. Ill. May 8, 2006) (where plaintiff had deleted and modified thousands of computer files, court awarded default judgment as well as attorneys' fees and costs); Covucci v. Keane Consulting Group, Inc., No. 033584, 2006 WL 2004215, at *1 (Mass. Super. Ct. May 31, 2006) (finding that dismissal of the complaint was warranted where "plaintiff intentionally and in bad faith engaged in a pattern of conduct that encompassed the destruction of evidencethat prejudiced the defendants in their ability to defend against these claims").

While courts have issued adverse inference instructions and entered default judgments in situations involving gross discovery abuses, courts have cautioned that the imposition of severe sanctions such as the entry of a default judgment or dismissal of a complaint is not warranted in all situations where a party has failed to comply with its discovery obligations. For example, in General Medicine, PC v. Morning View Care Centers, No. 2:05CV439, 2006 WL 2045890 (S.D. Ohio, July 20, 2006), a defendant sought dismissal of the plaintiff's complaint because of alleged delays and failures to produce requested discovery. The court held that such a "severe" sanction was not appropriate, even though "it would have been better had the production been more prompt," because the defendant could not show willful disregard or bad faith on the part of the plaintiff, or that the defendant had been prejudiced. Id. at * 5-6 (noting that the court already imposed the sanction of attorneys' fees on the plaintiff). As in General Medicine, where courts have found that a party's discovery conduct is objectionable, but does not reach the level of abuse found by the court in Morgan Stanley, courts have resorted to more traditional sanctions, such as monetary sanctions. See, e.g., Creative Sci. Sys., Inc. v. Forex Capital Mkts., No. C 04-03746JF, 2006 WL 870973, at *7 (N.D. Cal. Apr. 4, 2006) (declining to issue adverse inference instruction, but awarding monetary sanctions where "the failure to take affirmative steps to comply with the Preservation Order - which would have caused [the defendants] not to reinstall the operating systems on the servers at issue - is evidence of at least some degree of bad faith.").

While Morgan Stanley and similar decisions stand for the proposition that a party's intentional disregard for electronic discovery obligations - such as purposefully failing to search for relevant electronic information, or allowing potentially relevant electronic information to be deleted or overwritten - is a clear basis for sanctions, these cases also are instructive in so far as they emphasize that it is crucial for corporations and their counsel to have a thorough understanding of their electronic files and systems. Ideally, early in the case, corporations and their counsel should discuss the company's ability to retrieve and produce responsive electronic information. Specifically, it is important to determine where responsive electronic information is likely to be found, the format in which it is stored and the related time and cost involved in producing such information.

Burdens And Costs

Although it may be tempting to throw one's hands up at the thought of undertaking e-discovery, Morgan Stanley and similar decisions demonstrate that such an approach is unwise. Clearly, it is important for corporations and their counsel to take appropriate steps to comply with their discovery obligations. But at the same time, corporations and their counsel should bear in mind that locating, retrieving, reviewing and ultimately producing electronic information can be very costly, depending on the nature of the discovery requested and the manner in which a company's electronic information is stored. Accordingly, in certain situations it may be appropriate to seek to limit e-discovery that is burdensome and costly.

In so doing, corporations and their counsel should keep the following considerations in mind. First, as noted above, in the early stages of litigation companies should assess the kind of potentially responsive electronic information they have in their possession and determine the extent to which they will be able to produce such information in discovery.

Second, companies should understand that while certain e-discovery requests may be new, the traditional rules governing limitations on discovery that is excessive and burdensome still apply. See, e.g., Thompson v. Jiffy Lube Int'l, Inc., No. 05-1203-WEB, 2006 WL 1174040, at *3 (D. Kan. May 1, 2006) (denying, as unduly burdensome, a request for "all corporate and employee e-mail communications dating back to 1997," because "[t]he mere suspicion that a document containing relevant evidence might be located in [a] defendant's computer files does not justify the production of all email communications or computer records"); Quinby v. WestLB AG, No. 04 Civ. 7406, 2006 WL 59521, at *2-3 (S.D.N.Y. Jan. 11, 2006) (quashing two subpoenas seeking production of all e-mails sent to or received by plaintiff's personal e-mail account as overbroad and not limited to relevant material). Where the burden and cost of production are disproportionate, it is completely appropriate to assert objections to the discovery requests or to seek protection by motion.

Third, courts have been sympathetic to the proposition that parties should not be required to produce in electronic format information that is merely duplicative of other discovery that has already been provided. See, e.g., India Brewing, Inc. v. Miller Brewing Co., - F.R.D. - , 2006 WL 2023396, at *3 (E.D. Wis., July 13, 2006) (holding that "[t]o the extent that the documents plaintiff sought in its requests are kept in hard copy in the usual course of business, plaintiff is not entitled to any other format").

Finally, companies and their counsel should become familiar with the proposed amendments to the Federal Rules of Civil Procedure that are slated to become effective on December 1, 2006. The proposed amendments specifically address production of "electronically stored information" and impose certain restrictions on production of such information.2 In that regard, the proposed amendments allow litigants to object to the production of electronically stored information that is "not reasonably accessible because of undue burden or cost." See Proposed Fed. R. Civ. P. 26(b)(2)(B). In addition, the proposed amendments make clear that "[a]bsent exceptional circumstances," a court cannot impose sanctions for failing to produce electronically stored information that was lost as a result of the "routine, good faith operation of an electronic information system." See Proposed Rule 37(f).

Conclusion

While they can be treacherous at times, the waters of e-discovery can be navigated successfully if corporations and their counsel plan carefully. A key part of that preparation involves developing an accurate understanding of both the potential sources of responsive electronic information and a company's ability to produce such information without undue burden and cost.1 See Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI, 2005 WL 679071 (Fla. Cir. Ct. Mar. 1, 2005); Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., No. CA 03-5045 AI, 2005 WL 674885 (Fla. Cir. Ct. Mar. 23, 2005). The jury entered verdicts of $604 million in compensatory damages and $850 million in punitive damages against Morgan Stanley. See Stephen Taub, Morgan Stanley's Legal Bill Hits $1.4B, CFO.com (May 20, 2005). Morgan Stanley has appealed. See Carl Jones , Morgan Stanley: 'Record Is Clear' That Florida Judge Erred, Law.com Daily Business Review (Dec. 14, 2005).
2 The proposed amendments address many additional topics relating to electronic discovery, such as parties' meet and confer obligations, discovery scheduling orders, and privilege considerations.

Richard L. McConnell and Sandra Tvarian Stevens are Partners at Wiley Rein & Fielding, LLP. Jonathan S. Woodruff is an Associate with the firm. The authors are members of the firm's insurance and litigation practices. They regularly represent insurers and reinsurers in insurance coverage matters and in reinsurance disputes, and appear before state and federal courts and arbitration panels.

Please email the authors at rmcconnell@wrf.com, sstevens@wrf.com and jwoodruff@wrf.com with questions about this article.