An interesting article appeared recently in the New York State Bar Association Journal on Navigating and Avoiding Sanctions for Failing to Preserve Electronic Information. The article discussed, among other things, what level of sanctions are appropriate when a party fails to preserve electronic information. The article discusses Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010). In this case, the court held that the intentional destruction of relevant ESI (electronically stored information) or paper documents can result in severe sanctions; however, the innocent party must first prove several elements. You can read the entire opinion here.

The non-spoliating party must prove that:
The spoliating party had control over the evidence and an obligation to preserve when the evidence was destroyed;
The spoliating party acted with a guilty state of mind; and
The missing evidence is relevant.

The test set out by Judge Scheindlin seeks to avoid overly harsh sanctions when destruction was inadvertent, or did not result in the loss of relevant evidence. In the opinion, the court notes that, "the party seeking relief has obligation to make a showing of relevance and prejudice, lest litigation become a 'gotcha' game rather than a full and fair opportunity to air the merits of a dispute."

With regards to the remedies, the judge can rely upon his or her "gut reaction," with the proposed sanctions for this misconduct ranging from cost-shifting and fines to preclusion and default judgment. The most severe sanctions, of course, should be imposed only in the most extreme cases.

The court also took the opportunity to discuss legal holds put in place by parties to a lawsuit, stressing the need for careful preservation of electronic information. According to a recent study by Kroll Ontrack that states that only 57% of U.S. corporations have identified means to preserve potentially relevant data when litigation or regulatory investigation is anticipated. Exacerbating the situation is the great divide between corporate legal and IT departments. The lesson is that E-discovery related issues are becoming more apparent to the courts, and the courts are growing more intolerant of errors in the process.

A prudent company should implement effective archiving systems or create an application inventory data map. The duty to preserve may arise at different moments, depending on the activity in question. As such, the most prudent course is to proactively place a litigation hold whenever litigation is anticipated. Counsel should also make sure the legal hold is in effect until final judgment, a settlement has been reached, and a formal release has been signed by all parties, or the case is dismissed and there are no further proceedings.

From the plaintiff's perspective (our specialty) parties should consider retaining an e-discovery advisor as soon as a case is filed, so that the plaintiff can carefully assess what information a defendant has and then put the defendant on notice, in no uncertain terms, that is must preserve said information. An e-discovery advisor allows a plaintiff to understand what limitations in data recovery are real concerns (including in terms of cost to the defendant, as it relates to the Federal Rule limitations on what can be required of a party) and which ones are smoke screens to hide information. Advise regarding how to avoid document dumps, how to object to document dumps if they occur, and how to nail down a data-map of defendant's storage information is invaluable. It can increase the value of the case and can decrease the cost of discovery.

If you have any questions regarding this matter, feel free to contact The Simon Law Firm, P.C.