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Idealistic musings about eDiscovery
I came up with the term “terminal legal hold” to describe the situation faced by an enterprise which can’t bring itself to delete obsolete data, lest any of that data be potentially responsive in future litigation and the organization’s document destruction policy couldn’t pass the Zubulake v. UBS Warburg “systematic and repeatable” test. The enterprise fears sanctions so greatly that they never delete anything. For obvious reasons, this isn’t a best practice.
A New York federal court, however, has now tacitly approved of — indeed, ordered — the “terminal legal hold”.
Pippins v. KPMG is being litigated before Magistrate Judge James L. Cott, in the Southern District of New York. KPMG is being sued by two as-yet-uncertified classes of audit associates who claim that they were misclassified as exempt employees under the Fair Labor Standards Act, and therefore are owed overtime pay. There are as many as 9,000 potential class members, and thus as many as 9,000 hard drives which they may have used. Counsel for the two parties could not agree on the sampling criteria or the number of drives to include in the sample. KPMG asserted that the cost to preserve the more than 2,500 drives currently in its possession was more than $1.5 million, and proposed that for the sake of proportionality, one hundred randomly-selected hard drives should be preserved as the sample set.
On October 11, Judge Cott ruled that KPMG has to preserve the hard drive of every potential class member. Because the district judge had not yet ruled on class certification, every auditor was a potential plaintiff and therefore a “key player” as defined in Zubulake v. UBS Warburg. “With so many unknowns involved at this stage in the litigation,” Judge Cott wrote, “permitting KPMG to destroy the hard drives is simply not appropriate at this time.”
KPMG filed an objection brief to the district judge on October 28, writing, “The ‘key player’ analysis has never been extended to require the preservation of ESI of every potential member of a putative class or proposed FLSA collective action.” Also:
[N]ever has it been held that an employer on notice of a putative class action or proposed collective must impose a ‘litigation hold’ and preserve ESI (among other materials) for every current or former employee who theoretically could bring an individual action in the future. If companies were required to retain documents whenever there is a mere possibility that they could be sued, they effectively would face a perpetual duty to preserve and thus would be unable to implement document-retention policies.
In other words: a terminal legal hold. Leonard Deutchman referred to this today as “the perfect e-discovery storm”:
At virtually the earliest moment in the litigation, the plaintiffs require the defendant to spend a remarkable amount of money simply on preservation — the cost to search, review and produce e-discovery has not yet even been discussed. … If the legal claims are insufficient or the class uncertifiable, millions will have been wasted in preservation; if, however, the allegations are shown to be strong and the class intact but the drives are not preserved, the defendant may then have been allowed to destroy, or let be destroyed, the mythical smoking gun ESI. Because the cost of preservation is so high, the issue of cost has arisen earlier than it usually does (when calculating the costs of processing, searching and production) — so early that neither side has the facts to support its position. Thus, the potential for gross injustice lies in taking either position.
This led to the filing of an amicus brief by the United States Chamber of Commerce on November 8, arguing that the magistrate judge got it wrong. “’Key players’ … could not, and does not, embrace every member of a putative class of thousands. … Put bluntly: no absent member of a properly certified class or non-party to a properly certified collective action should be a ‘key player.'”
Judge Cott may have gotten the “key player” analysis wrong, but Deutchman argues that the judge otherwise made the right call:
As a legal matter, and as a way of governing e-discovery practice, the court was wise to enforce the rules as they are by denying both sides’ motions, advising the defendant to allow the plaintiffs to examine the sample drives and letting the parties then act in their enlightened self-interest. In so doing, the court instructs those who follow to act as the defendant should have rather than as it did. Cooperation generally works when the parties act in their enlightened self-interest. By interpreting the rules properly, the court “enlightened” the defendant as to what its self-interest truly was. Presumably it, and those reading the opinion, will now know how to act.
My take on this: Judges are typically referees, and should not take it upon themselves to rescue parties from their own mistakes. However, every rule has an exception, and this strikes me as a valid one.
KPMG said the cost of preserving each hard drive would cost them $600; multiply by 9,000 hard drives, and they will have spent $5.4 million before processing a single file. Even if KPMG should have made stronger efforts at cooperation with respect to sampling of the preserved hard drives (and, in my opinion, they should have), Judge Cott’s decision sets a dangerous precedent in favor of dilatory plaintiffs who would rather win their case through expense and attrition than on the merits.
While as a commentator I’d like to be less cynical and believe that most plaintiffs want their cases litigated fairly, my experience as a defense litigator has taught me otherwise. If a savvy plaintiff’s lawyer sees an opportunity to make a case so expensive for the defendant that the defendant will gladly settle, regardless of culpability, the lawyer will gladly do so. The higher the potential expense, the greater will be the amount of the settlement. If Judge Cott’s order is allowed to stand, the mere threat of class certification would be enough to cause large defendants to reach for their checkbooks rather than begin the expensive task of preserving hard drives that might contain evidence that might be of use in some unspecified, unfiled, and unthreatened future litigation. The net result? Cases won’t be tried on the merits, and no enterprise will delete anything ever again.
I would have preferred Judge Cott force the parties to agree on a sampling protocol, appointing a special master if need be, and allowing KPMG to manage its own preservation of hard drives upon pain of sanctions if they mess it up (the cost of which , in all likelihood, would be far less than the cost of preserving all 9,000 hard drives).
(Update 1/9/12: Law.com’s Evan Koblentz reports this morning that the parties may reach a resolution on this issue.)
An e-mail exchange this morning with one of our product managers has got me thinking … and that’s always dangerous.
Most enterprises that issue legal hold notifications to their custodian employees use good ol’ e-mail. The hold notification gets pasted into the body of the e-mail, and off it goes, (theoretically) to the recipient. Perhaps the e-mail was sent with a return receipt requested; and if the recipient is feeling generous, that receipt just might come back to prove that the message was received. As for whether the notification ever gets read? Well, we’ll just have to assume the best, won’t we?
Problem is, this isn’t a very practical solution. First, let’s look at the logistics. E-mails are not only subject to one-click deletion, but (at least in Microsoft Outlook and Exchange) can also be subject to custom routing rules. A user with the appropriate software permissions can easily create a rule to route all e-mails from, say, the Office of the General Counsel directly to the “Deleted Items” folder.
E-mail retention on the enterprise level also tends to be subject to shorter data preservation times than other types of electronic documents. If a custodian is on vacation when they get the e-mail, there is a possibility that the e-mail may not be there for download when the custodian gets back.
Finally, even if the e-mail is delivered in a timely manner and doesn’t get deleted, there’s no guarantee that the custodian will actually read it. And even if they do read it, they have the option (again, in Outlook; I don’t know about other systems) of denying the sender’s request to return a receipt.
The point of all this is that the enterprise remains vulnerable to “plausible deniability”. If a custodian can be shown to have read the hold notice, and they then proceed to violate it by spoliating evidence, the enterprise can likely protect itself from liability by arguing that in violating the hold notice, the custodian was acting outside the course and scope of their employment. Without that proof, the enterprise may remain firmly on the hook.
Now, the content of the hold notice itself is probably privileged from discovery under attorney-client privilege and attorney work produce privilege. However, the process of issuing that hold notice, and of obtaining proof of receipt, may not be privileged. In the recent case Cannata v. Wyndham Worldwide Corp., 2011 WL 3495987 (D. Nev. Aug. 10, 2011), the court held that the opposing party was entitled to know “what has actually happened in this case, i.e., when and to whom the litigation hold letter was given, what kinds and categories of ESI were included in defendant’s litigation hold letter, and what specific actions defendant’s employees were instructed to take to that end.” (Emphasis mine. I commend to you Dennis Kiker’s excellent discussion of the Cannata case at his blog.)
At Autonomy, our legal hold software notifies the custodian via e-mail that they have a message awaiting them from the GC’s office, and to click on an enclosed link. The link serves a form from our workflow management engine, completely independent from the e-mail, containing the language of the legal hold notification, and requiring an electronic signature as acknowledgment that the form has been received and read. This ensures that the custodian cannot claim, “I didn’t get the e-mailed notice; and if I did, I deleted it; and if I didn’t delete it, I didn’t read it, etc.,” as a way to shift liability for spoliation back onto the enterprise. To me, this seems a MUCH better and safer practice that is more likely to withstand judicial scrutiny. (This is my opinion, not influenced by anyone at Autonomy, and I firmly and personally believe what I have written here.)
The Zubulake V opinion (229 F.R.D. 422, 433 (S.D.N.Y. 2004)) set the standard quite plainly: ‘‘[A] party cannot reasonably be trusted to receive the ‘litigation hold’ instruction once and to fully comply with it without the active supervision of counsel.’’ So why do so many counsel continue to insist that an e-mail “blast” of hold notices is good enough? Food for thought …