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ESI Spoliation Case Will Be Widely Followed


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Expert Witness: Fulcrum Inquiry
In another case destined to be widely quoted, U.S District Judge Shira Scheindlin of Zubulake fame issued a ruling electronic discovery spoliation which she entitled Zubulake Revisited: Six Years Later. (See Original our case summary for a primer on the first Zublake decisions).
The Pension Committee for the University of Montreal Pension Plan vs. Bank of America Securities et al. (USDC case 05 Civ. 9016 (SAS)), from the Southern District of New York provides a scholarly analysis of ESI (electronically-stored information) spoliation and sanctions. It adds to the existing case law on electronic data spoliation by addressing the evaluation of culpability and related burden of proof.

The Court awarded monetary sanctions against the plaintiffs, and determined that the defendants were entitled to an adverse inference jury instruction where the failure to preserve relevant electronic evidence was “grossly negligent”. However, unlike some of the cases on ESI spoliation, this is not a situation of purposeful misconduct. Instead, the Court concluded that the plaintiffs “conducted discovery in an ignorant and indifferent fashion”. The Court was critical of these plaintiffs and others who continue to treat ESI in a less than rigorous manner with a “pure heart and an empty head”. In the Court’s words:

“In the discovery context, the standards have been set by years of judicial decisions analyzing allegations of misconduct and reaching a determination as to what a party must do to meet its obligation to participate meaningfully and fairly in the discovery phase of a judicial proceeding. A failure to conform to this standard is negligent even if it results from a pure heart and an empty head.”

The use of the word “negligent” and “negligence” throughout the opinion raises the standard from what is currently performed by many litigators and their clients. The Court provided examples of negligence, as follows:

“… the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.

The next step in the discovery process is collection and review. Once again, depending on the extent of the failure to collect evidence, or the sloppiness of the review, the resulting loss or destruction of evidence is surely negligent, and, depending on the circumstances may be grossly negligent or willful. For example, the failure to collect records--either paper or electronic--from key players constitutes gross negligence or willfulness as does the destruction of email or certain backup tapes after the duty to preserve has attached. By contrast, the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players, likely constitutes negligence as opposed to a higher degree of culpability. Similarly, the failure to take all appropriate measures to preserve ESI likely falls in the negligence category.”

The case’s larger contribution involves the remedies that are appropriate when mistakes are made. The Court started with a description of the philosophy and purpose of sanctions, as follows:

“It is well accepted that a court should always impose the least harsh sanction that can provide an adequate remedy. The choices include--from least harsh to most harsh--further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal (terminating sanctions). The selection of the appropriate remedy is a delicate matter requiring a great deal of time and attention by a court [footnotes omitted].”

The most difficult situations occur when data is entirely lost. In this situation, one rarely can directly examine the impact of that which is gone. Here, the Court urged restraint against sanctions until the innocent party could demonstrate additional facts. Specifically, even when spoliation occurred:

“In short, the innocent party must prove the following three elements: that the spoliating party (1) had control over the evidence and an obligation to preserve it at the time of destruction or loss; (2) acted with a culpable state of mind upon destroying or losing the evidence; and that (3) the missing evidence is relevant to the innocent party's claim or defense.”

Relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligent manner. "Where a party destroys evidence in bad faith, that bad faith alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party. … However, when the spoliating party was merely negligent, the innocent party must prove both relevance and prejudice in order to justify the imposition of a severe sanction. …

“No matter what level of culpability is found, any presumption is rebuttable and the spoliating party should have the opportunity to demonstrate that the innocent party has not been prejudiced by the absence of the missing information. If the spoliating party offers proof that there has been no prejudice, the innocent party, of course, may offer evidence to counter that proof. While requiring the innocent party to demonstrate the relevance of information that it can never review may seem unfair, the party seeking relief has some obligation to make a showing of relevance and eventually prejudice, lest litigation become a "gotcha" game rather than a full and fair opportunity to air the merits of a dispute. If a presumption of relevance and prejudice were awarded to every party who can show that an adversary failed to produce any document, even if such failure is completely inadvertent, the incentive to find such error and capitalize on it would be overwhelming. This would not be a good thing.” [Footnotes omitted]

In employing these tests, the question is who has the burden of proof. The Court provides the following guidance on this point:

“To ensure that no party's task is too onerous or too lenient, I am employing the following burden shifting test: When the spoliating party's conduct is sufficiently egregious to justify a court's imposition of a presumption of relevance and prejudice, or when the spoliating party's conduct warrants permitting the jury to make such a presumption, the burden then shifts to the spoliating party to rebut that presumption. The spoliating party can do so, for example, by demonstrating that the innocent party had access to the evidence alleged to have been destroyed or that the evidence would not support the innocent party's claims or defenses. If the spoliating party demonstrates to a court's satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction might still be required.”

When wrongful conduct requires sanctions, the case provides guidance on the nature of such sanctions, as follows:

“Like many other sanctions, an adverse inference instruction can take many forms, again ranging in degrees of harshness. The harshness of the instruction should be determined based on the nature of the spoliating party's conduct--the more egregious the conduct, the more harsh the instruction. …

In its most harsh form, when a spoliating party has acted willfully or in bad faith, a jury can be instructed that certain facts are deemed admitted and must be accepted as true. At the next level, when a spoliating party has acted willfully or recklessly, a court may impose a mandatory presumption. Even a mandatory presumption, however, is considered to be rebuttable. [Footnotes omitted]

The least harsh instruction permits (but does not require) a jury to presume that the lost evidence is both relevant and favorable to the innocent party. If it makes this presumption, the spoliating party's rebuttal evidence must then be considered by the jury, which must then decide whether to draw an adverse inference against the spoliating party. This sanction still benefits the innocent party in that it allows the jury to consider both the misconduct of the spoliating party as well as proof of prejudice to the innocent party. Such a charge should be termed a "spoliation charge" to distinguish it from a charge where the a jury is directed to presume, albeit still subject to rebuttal, that the missing evidence would have been favorable to the innocent party, and from a charge where the jury is directed to deem certain facts admitted.” [Footnotes omitted]

To avoid these challenges altogether, here is a summary of what needs to be done (i) upon the outset of litigation, or (ii) whenever litigation is reasonably anticipated:

1. Identify key personnel and issue a written litigation hold;

2. Capture and preserve relevant electronic and paper records of the key personnel, including those of former employees;

3. Preserve backup tapes when (i) they are the sole source of relevant information, or (ii) they relate to key personnel;

4. Periodically remind key personnel (including new employees) of the need to continue to preserve new information that has not been part of the central gathering and preservation process that has already occurred;

5. Supervise the above efforts by legal counsel or retained computer experts who are familiar with litigation requirements. Supervision should not be blindly delegated to the litigant’s employees.

A careful record should be kept of these efforts. Who did the work, what was searched, why the specific steps were believed adequate, and the supervision of the entire effort needs to be documented and have the appearance of reasonableness. Reasonableness should be affected by the size of the case, so that larger cases (such as Pension Committee, which has $550 million at issue) deserve a greater budget and level of diligence.

Some evidence will usually be missed, simply because the volume of ESI is too great and the cost of perfection prohibited. The Court realized that costs of performing this work are a relevant consideration, as follows:

“In an era where vast amounts of electronic information is available for review, discovery in certain cases has become increasingly complex and expensive. Courts cannot and do not expect that any party can meet a standard of perfection. Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party.”

This case does an excellent job of providing a framework for the analysis of spoliation claims and the sanctions that should follow.

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
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