[Editor’s Note: This article was first published August 16, 2023 and EDRM is grateful to Tom Paskowitz and Robert Keeling of our Trusted Partner, Sidley, for permission to republish. The opinions and positions are those of the author.]
This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
1. an order from the U.S. District Court for the District of Kansas finding that good cause was shown for expedited forensic imaging of certain of Defendants’ computers and storage devices given the nature of the claims and the need to preserve the information on the devices, but also finding that good cause was not shown for similar treatment of personal cell phones
2. a ruling from the U.S. District Court for the Southern District of Ohio finding that Plaintiff had waived privilege over certain documents it had inadvertently produced when it failed to timely rectify the disclosure, and that the Plaintiff could not preclude the Defendant from using the privileged documents under either the Federal Rules of Civil Procedure or the parties’ clawback agreement
3. a decision from the U.S. District Court for the Southern District of New York denying an adverse inference sanction for spoliation where a bankruptcy trustee had negligently discarded a server from the bankruptcy estate containing electronically stored information (ESI) that was relevant to the claims against the Defendant
4. an opinion from the U.S. District Court for the District of Maryland affirming a special master’s order requiring the Plaintiff to manually review the documents responsive to agreed-on search terms based on the parties’ protocol governing the review and production of ESI
1. An order from the U.S. District Court for the District of Kansas finding that good cause was shown for expedited forensic imaging of certain of Defendants’ computers and storage devices given the nature of the claims and the need to preserve the information on the devices, but also finding that good cause was not shown for similar treatment of personal cell phones.
In Ainstein AI, Inc. v. ADAC Plastics, Inc., No. 23-2166-DDC-TJJ, 2023 WL 3568661 (D. Kan. May 19, 2023), U.S. Magistrate Judge Teresa J. James addressed whether good cause was shown for expedited forensic imaging of work computers, electronic storage devices, or personal cell phones.
In this case involving claims for misappropriation of trade secrets and unfair competition related to a joint venture between the parties, Plaintiff alleged that four of Defendant’s employees downloaded tens of thousands of documents containing Plaintiff’s trade secrets from a Google drive to which Plaintiff had given them access as part of the joint venture. Id. at *1-2. Soon after Plaintiff filed its claim, it moved for a preliminary injunction and sought expedited discovery concerning the downloading of these materials in the form of forensic imaging of various computers, storage devices, and cell phones. Id. at *4.
Plaintiff argued that forensic imaging was necessary “because it is the only method of testing whether the downloaded files have been used or modified as the imaging will preserve the system logs and document metadata of the hard drives and devices onto which the material was downloaded and through which it may have been transmitted.” Id. at *5. Defendant argued that expedited discovery was not warranted because it had implemented and would continue to implement a litigation hold and would comply with all of its preservation obligations, including its obligations under Fed. R. Civ. P. 37(e). Id. at *3.
Magistrate Judge James first noted the general rule that “discovery may not commence before the parties have conferred as required by Rule 26(f) of the Federal Rules of Civil Procedure,” but explained that Plaintiff would be entitled to the expedited forensic imaging in question if it demonstrated “good cause.” She found that Plaintiff had demonstrated good cause for expedited discovery because a motion for a preliminary injunction was pending and such discovery would be “reasonable and proportional to the needs of this case.” In particular, she found that discovery concerning the data files and how Defendant used them after downloading the files from Google Drive was crucial to the issues raised in Plaintiff’s preliminary injunction motion, and that it would be “important to examine the devices at issue as soon as possible or to disallow use of the devices until the imaging can be completed. Unallocated space can be overwritten quickly when files are deleted, which then makes forensic analysis futile.” Id. at *4. She further found that the burdens of forensic imaging were “not out of the ordinary in these types of cases involving intellectual property.”
Magistrate Judge James rejected Defendant’s argument that Plaintiff needed to make a “strong showing” that Defendant had failed to comport with its discovery obligations to order forensic imaging because “that is a misstatement of this court’s precedent.” Id. at *5. She noted that courts “remain cautious” about ordering forensic imaging and appropriately limit such imaging to “guard against undue obtrusiveness” and “where the request is extremely broad in nature and the connection between the computers and the claims in the lawsuit are unduly vague or unsubstantiated in nature.” Id. (citations and quotations omitted). But she explained that imaging is especially appropriate in trade secrets cases that involve electronic information.
Magistrate Judge James found good cause for expedited discovery and ordered the forensic imaging of Defendant’s employees’ work computer and storage devices. Id. at *4-7. She found that the trade secrets claims provided good cause for the imaging of the computer storage devices and work computers, and that forensic imaging of these devices was necessary “to preserve information relevant to showing whether Defendant misappropriated the intellectual property at issue.” She thus ordered forensic imaging pursuant to an appropriate ESI protocol and the existing protective order in the case. Id. at *6.
But Magistrate Judge James found that Plaintiff had not shown good cause for the forensic imaging of personal cell phones, even though Defendant’s employees did not have separate work and personal cell phones (only personal cell phones). She first held that Plaintiff had not demonstrated a unique benefit to the imaging of the personal cell phones. She reasoned that even though the employees lacked work phones, it was still unclear whether the employees had actually used their phones for work. She also noted that Plaintiff had not explained why imaging the cell phones would be necessary if the employees’ computers and storage devices were already being imaged.
Magistrate Judge James also held that imaging the cell phones had costs that argued against their imaging. She noted that generally “personal cell phones likely contain a tremendous volume of information, including possibly text messages, email messages, phone logs, and photographs that are not at all relevant.” Id. (citation omitted). As such, she found the request for personal cell phone imaging “overly broad, unduly burdensome, and unduly intrusive” because there would be a “disproportionate amount of personal information totally irrelevant to this lawsuit” on the phones. Id. at *7. Magistrate Judge James also held that the early nature of the case cut against the imaging of personal devices “for an unspecified of amount of time,” especially because of “the heavy reliance many cell phone users place upon their devices.” Finally, Magistrate Judge James “question[ed] whether Defendant’s employees’ personal cell phones are within the possession, custody, or control of Defendant such that it could be compelled to produce them for imaging.”
2. A ruling from the U.S. District Court for the Southern District of Ohio finding that Plaintiff had waived privilege over certain documents it had inadvertently produced when it failed to timely rectify the disclosure, and that the Plaintiff could not preclude the Defendant from using the privileged documents under either the Federal Rules of Civil Procedure or the parties’ clawback agreement.
In LifeBio, Inc. v. Eva Garland Consulting, LLC, No. 21-cv-722, 2023 WL 3258586 (S.D. Ohio May 4, 2023), U.S. Magistrate Judge Kimberly A. Jolson addressed whether either the Federal Rules of Civil Procedure or the parties’ clawback agreement precluded Defendant from using indisputably privileged emails that Plaintiff had inadvertently produced in light of Plaintiff’s failure to timely assert the privilege.
Plaintiff, a health technology company, brought claims against Defendant, a consulting company, for breach of contract and breach of good faith and fair dealing. Id. at *1. In the course of responding to Defendant’s discovery demands, Plaintiff produced emails to Defendant that the parties would later agree, and Magistrate Judge Jolson would later find, contained privileged material. Id. at *1-3. Almost a year after the emails’ inadvertent disclosure, Plaintiff applied to the court to strike the emails from the record, including from Defendant’s motion for summary judgment, Defendant’s opposition to Plaintiff’s motion for summary judgment, and two deposition transcripts. Id. at *1-2. Because there was no question that the emails were privileged, the remaining question was whether Plaintiff was entitled to strike the emails from the record under either the parties’ clawback agreement or Federal Rule of Evidence 502.
Magistrate Judge Jolson started her analysis with an examination of the relevant legal rules. She noted that whether documents are privileged is a question of state law (in this case Ohio law), but whether privilege has been waived in federal court is a question of federal law governed by Federal Rule of Evidence 502. Normally, providing privileged material to another party in federal court waives the privilege with respect to that material. However, the Federal Rules of Evidence provide at least two ways for a party to limit its waivers of privilege: Federal Rule of Evidence 502(b) and Federal Rule of Evidence 502(e). Rule 502(b) provides that disclosure of privileged material does not operate as a waiver if “(1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error ….” Id. at *3. Rule 502(e) states that “[a]n agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order,” which Magistrate Judge Jolson stated “‘codifies the well-established proposition’ that parties may agree ‘to limit the effect of waiver by disclosure between or among them.’” Id. at *4 (quoting the Federal Rules of Evidence advisory committee notes on Rule 502(e)). Although Magistrate Judge Jolson noted that the Sixth Circuit had not yet taken up the issue, she held that Rule 502(e) allows a clawback agreement between the parties to modify the specific requirements of Rule 502(b). Id. at *4-5.
Magistrate Judge Jolson held that Plaintiff failed to appropriately claw back the emails it produced under either the parties’ agreement or the requirements of Rule 502(b). She noted that the parties’ agreement provided that parties would “have ten business days” in which to do three things: “(1) assert a claim for privilege in writing; (2) produce a privilege log setting forth the basis of privilege for each privileged document; and (3) produce redacted versions of the documents to the extent that only portions of them were privileged.” Id. at *5. This agreement was ratified by an order of the court. Magistrate Judge Jolson found that Plaintiff’s claim under the clawback agreement failed because Plaintiff did not make its request within 10 business days. Id. at *6. Additionally, Plaintiff failed to either produce a privilege log or redacted versions of the emails at issue. As such, Plaintiff waived privilege under the parties’ binding agreement.
Magistrate Judge Jolson rejected Plaintiff’s argument that Defendant could not use the privileged emails because Defendant failed to comply with Fed. Civ. R. 26(B)(8)(b) by “not promptly returning, sequestering, or destroying the specific information and using the information despite the claim being unresolved and Plaintiff maintaining privilege.” Id. at *7. She found that under Rule 26(B)(8)(b), which was partially incorporated into the parties’ clawback agreement, Defendant would be obligated to return, sequester, or destroy the privileged material only once Plaintiff made a claim of privilege. But Plaintiff did not make a claim of privilege until after privilege had already been waived.
Magistrate Judge Jolson held as well that Plaintiff could not claw back the emails under Rule 502(b). Although Plaintiff’s disclosure was plainly inadvertent, as required under the rule, Plaintiff did not “promptly take steps to rectify the error” and so could not avail itself of Rule 502(b)’s exception to waiver. To demonstrate this, Magistrate Judge Jolson described a series of failures to “protect the sanctity of the attorney-client privilege repeatedly, over a ten-month period.” Id. at *8. She noted that Defendant informed Plaintiff of the inadvertent disclosure, but Plaintiff did not take any action for a month, despite “repeated prompting by Defendant.” Plaintiff did not expressly assert privilege at that time. After this response by Plaintiff, Defendant asked that the parties confer regarding the emails and the privilege and waiver issues surrounding it, but Plaintiff never responded and made no more attempts over many months to claw back the emails. Magistrate Judge Jolson further highlighted that Plaintiff’s counsel allowed multiple witnesses, including Plaintiff’s CEO, to answer questions in depositions about the privileged emails and never brought the privilege issue to the court’s attention. At one of those depositions, “Plaintiff’s counsel stipulated to the at-issue email, then objected to it, then agreed with Defendant’s counsel that the email had been stipulated to.” Magistrate Judge Jolson also noted that Plaintiff did not raise a privilege issue in its opposition to Defendant’s motion for summary judgment, which used the emails as an exhibit, nor when the emails were used in response to Plaintiff’s motion for summary judgment. Finally, she noted that no request was made to put the emails under seal or any portion of the summary judgment briefing that incorporated them.
Magistrate Judge Jolson held that “nothing about Plaintiff’s attempts to rectify this situation was attentive, diligent, or even ‘reasonable,’” and “[n]or were they ‘prompt[ ].’” Id. at *9. She stated that Plaintiff “did not have a heavy burden to assert privilege but still failed to meet it, despite ample opportunity to do so.” Id. at *8. Instead, Plaintiff “ignored five emails from Defendant’s counsel about the at-issue documents” and “waited over 300 days,” which was “long after the proverbial cat was out of the bag.” Id. at *8-9. Magistrate Judge Jolson noted that “it was Plaintiff’s obligation to treat the privilege like a crown jewel” and it failed to do so. She therefore denied Plaintiff’s motion to strike the privilege material from the record. Id. at *9.
3. A decision from the U.S. District Court for the Southern District of New York denying an adverse inference sanction for spoliation where a bankruptcy trustee had negligently discarded a server from the bankruptcy estate containing electronically stored information (ESI) that was relevant to the claims against the Defendant.
In Convergent Distributors of Texas, LLC v. Alexander Capital, LP, No. 21-cv-1355 (JSR), 2023 WL 2751541 (S.D.N.Y. March 31, 2023), U.S. District Court Judge Jed S. Rakoff addressed whether spoliation sanctions were appropriate against the assignee of claims in bankruptcy related to a lost computer server that the bankruptcy trustee had failed to preserve.
Plaintiff, the assignee of claims in the bankruptcy proceeding of a pharmaceutical company called Inpellis, brought this adversary proceeding alleging breach of contract and fraud claims against Defendants related to their work on Inpellis’ failed initial public offering. Id. at *1. After discovery, Defendants moved for an adverse inference instruction under Federal Rule of Civil Procedure 37(e)(2) based on Plaintiff’s failure to preserve one of Inpellis’ servers and the electronic records contained on it after suing Defendants. Id. at *6.
The Inpellis server at issue became the property of the bankruptcy trustee as part of Inpellis’ bankruptcy proceedings. Id. at *7. While Plaintiff represented that neither it nor the bankruptcy trustee “ever accessed the server” and that neither party had “possession of the server,” it was unclear from the record whether the bankruptcy trustee or Plaintiff ever had actual, physical control over or access to the Inpellis server at any time.
An officer of Inpellis’s parent company who was under investigation by the SEC for conduct related to the bankruptcy had at one time accessed the server and downloaded documents from the server to a hard drive in connection with a subpoena to the parent company in the bankruptcy proceeding. That officer had decided which documents to download from the server at the direction of his own counsel. A copy of the hard drive containing the documents downloaded from the Inpellis server was later turned over to the bankruptcy trustee, and Plaintiff used the hard drive during discovery in this adversary proceeding.
After documents were downloaded from the Inpellis server, it was somehow disposed of or placed into a storage unit controlled by the bankruptcy trustee. The bankruptcy trustee later “abandoned the storage unit after representing to the bankruptcy court that the unit only contained miscellaneous outdated records not necessary to the administration of the case, and used office and laboratory furniture and equipment, including a small number of chairs, desks, and obsolete computers and monitors.”
In connection with Defendant’s spoliation motion, Judge Rakoff found that the bankruptcy trustee “made zero effort to access, copy, preserve, or otherwise review Inpellis’s computer server,” notwithstanding the “obvious likelihood that the server would contain material highly relevant” to the potential claims against Defendants. He agreed with Defendants that the bankruptcy trustee “entirely abdicated” its duty, and “contented itself with incomplete copies of the server made by a third party” whose conduct “contributed significantly to Inpellis’ bankruptcy in the first place.” Judge Rakoff further found that the Inpellis server likely would have contained relevant email accounts and financial records that were not included in any production Plaintiff made based on the incomplete hard drive.
Based on these facts, Judge Rakoff easily concluded that Plaintiff “failed to take even basic steps to preserve the [Inpellis] server, which almost certainly contained relevant evidence the destruction of which may well have prejudiced” Defendants. Id. at *6. But he noted that this conclusion did not suggest which measures were needed to cure any resulting prejudice. Id. at *8. Judge Rakoff explained that Rule 37(e)(1) permits courts to “order measures no greater than necessary to cure the prejudice,” including “forbidding the party that failed to preserve information from putting on certain evidence, permitting the parties to present evidence and argument to the jury regarding the loss of information, or giving the jury instructions to assist in its evaluation of such evidence or argument.” Id. at *8 (quoting Fed. R. Civ. P. 37, advisory committee’s notes to the 2015 amendment).
Judge Rakoff noted, however, that Defendants requested an adverse inference instruction under Rule 37(e)(2), which explicitly limits a court’s power to issue adverse inference instructions based on the failure to preserve ESI to situations where the court finds “that the party acted with the intent to deprive another party of the information’s use in the litigation….” Id. (quoting Fed. R. Civ. P. 37(e)(2)).
Judge Rakoff found that the record did not support an inference that the bankruptcy trustee or Plaintiff intentionally allowed the Inpellis server to be lost or destroyed so as to deprive Defendants of evidence contained on it, as the bankruptcy trustee never accessed or reviewed the server or had knowledge of what information may have been contained on it, separate and apart from the information downloaded to a hard drive. Judge Rakoff concluded that Rule 37(e)(2) did not permit an award of an adverse inference where the bankruptcy trustee’s behavior was “clearly negligent and arguably grossly negligent.”
Judge Rakoff rejected Defendant’s argument that adverse inference instructions may be given upon a mere finding that the spoliating party acted with a “culpable state of mind.” He explained that the Advisory Committee’s notes to the 2015 amendment to Rule 37(e) make clear that Rule 37(e)(2)’s requirement of an intent to deprive another party of information in specific litigation is meant to reject the award of adverse-inference instructions based on a finding of negligence or gross negligence. Because Defendants demonstrated at most gross negligence, Judge Rakoff concluded that he lacked the power to impose an adverse inference instruction, although he expressed openness to imposing other appropriate spoilation sanctions with respect to Plaintiff’s ability to introduce specific evidence, Defendants’ ability to refer to the loss of evidence, or with respect to other aspects of jury instructions. Id. at *9.
4. An opinion from the U.S. District Court for the District of Maryland affirming a special master’s order requiring the Plaintiff to manually review the documents responsive to agreed-on search terms based on the parties’ protocol governing the review and production of ESI.
In McCormick & Co., Inc. v. Ryder Integrated Logistics, Inc., — F.Supp.3d —-, 2023 WL 2433902 (D. Md. March 9, 2023), Chief Judge James K. Bredar addressed a special master’s order requiring Plaintiff to manually review the documents responsive to agreed-on search terms based on the parties’ protocol governing the review and production of ESI.
In this litigation involving competing claims for breach of contract, the parties agreed on lists of search terms to run across their ESI and negotiated an ESI protocol. Id. at *1. The ESI protocol provided that the parties’ obligation to conduct a reasonable search for documents in response to discovery requests would be deemed satisfied by reviewing documents captured by utilizing the methodology provided for in the protocol, and that “[t]he fact that a document is captured by a search pursuant to this protocol does not mean that such document is responsive to a discovery request or otherwise relevant to this litigation and Parties may exclude such nonresponsive documents from production.”
During discovery, a dispute arose as to whether the parties were required to manually review the documents captured by the agreed search terms for relevance prior to production or whether they could produce those documents without a document-by-document review. Id. at *2. Plaintiff contended that the ESI protocol did not require the parties to conduct a manual review of documents identified through the use of search terms, but Defendant took the opposite view. A special master assigned to resolve this dispute sided with Defendant, reasoning that the ESI protocol expressly contemplated a manual review of the documents and that such reading was consistent with Federal Rule of Civil Procedure 26(b)(1)’s provision that only relevant evidence is discoverable. The special master also rejected Plaintiff’s argument that the costs associated with the manual review (estimated at $240,000 on a claim for $4 million) was not proportional to the case.
Chief Judge Bredar began his analysis with the language of the ESI protocol, which provided that “a party’s obligation to conduct a reasonable search for documents in response to discovery requests shall be deemed to be satisfied by reviewing documents that are captured by utilizing the methodology provided for in this Protocol,” and that “[t]he fact that a document is captured by a search pursuant to this protocol does not mean that such document is responsive to a discovery request or otherwise relevant to this litigation and Parties may exclude such nonresponsive documents from production.” Chief Judge Bredar viewed the relevant question as whether the parties “agreed to conduct a page-by-page responsiveness review prior to production.”
Chief Judge Bredar concluded that the ESI protocol required a page-by-page responsiveness review. Id. At *3. He found such review “plainly require[d]” by the language in the ESI protocol providing that “a party’s obligation to conduct a reasonable search for documents in response to discovery requests shall be deemed to be satisfied by reviewing documents that are captured by utilizing the methodology provided for in this Protocol.” In making this finding, Chief Judge Bredar rejected Plaintiff’s arguments that the ESI protocol merely permitted a producing party to review documents that were captured by using the methodology provided for in the ESI protocol, and that the party’s obligation was satisfied by applying search terms alone. Chief Judge Bredar again relied on the language in the ESI protocol that deemed a party’s obligation satisfied “by reviewing documents.”
Chief Judge Bredar also rejected Plaintiff’s argument that the special master’s order requiring a page-by-page review contravened the proportionality standard set forth in Federal Rule of Civil Procedure 26(b)(2)(B), which requires consideration of the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Id. at *4. Chief Judge Bredar found that although the special master’s order had not expressly addressed each of these factors, the order had concluded that the costs of the review were proportional to the needs of the case.
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