Post Process

Everything to do with E-discovery & ESI

E-Discovery Pitfalls: Uncharted Territory

Posted by rjbiii on October 5, 2007

The story of Phoenix Four v. Strategic Resources Corporation is the third installment in our series on e-discovery pitfalls.

Phoenix Four (Phoenix), an investment firm, sued Strategic Resources Corp. (SRC), its investment advisor, for breach of fiduciary duty, common law fraud, and negligent misrepresentation. Phoenix was SRC’s sole client. Class, what happens when your only client sues you? Right, you go out of business.

In April or May 2004, Phoenix stopped paying fees to SRC and SRC ceased operations shortly thereafter. Between August and October 2004, SRC delivered to Phoenix and its representatives all paper records that belonged to it. Between August and September 2004, SRC transferred all of Phoenix’s electronic accounting records to Phoenix’s designated accounting representatives.

(citations omitted).

As the revenue stopped coming in, SRC found itself unable to pay the rent.

Sometime in February or March 2005, SRC’s landlord commenced proceedings to evict SRC from its offices in Carnegie Hall Towers, New York. SRC vacated its office space on or about March 31, 2005, prior to the commencement of this lawsuit. When the SRC Defendants moved out of Carnegie Hall Towers, they left behind Phoenix marketing documents, old prospectuses, and trade publications. They also left behind at least ten computer workstations. SRC’s landlord subsequently disposed of the abandoned documents and computers. [SRC co-founder Paul] Schack did not recall discussing with Van Pelt, Hopkins, or anyone else whether the workstations contained Phoenix-related material prior to abandoning them. By that time, SRC’s technical specialist had already left SRC’s employ.

(citations omitted, emphasis added).

Okay, here is the first real trouble with discovery, although it would be wrong to say that trouble (with a capital “T”) hadn’t already arrived. Obviously, just leaving workstations containing potentially relevant material to a lawsuit after you’ve realized you’re about to be sued is a bad idea. The court thinks so too, but we’ll get to that. What happens next?

The SRC Defendants took with them from Carnegie Hall Towers about fifty boxes containing business records pertaining to SRC and Phoenix, two servers, and at least two computer workstations. Schack, who subsequently started a new business venture, housed these items in his new office and used at least one of the servers in his new business.

Okay, so now we have the old equipment residing in a new business. In May, Phoenix files its complaint. The judge picks up the tale.

Prior to and immediately following receipt of Phoenix’s first set of document demands in August 2005, Mound Cotton, counsel to the SRC Defendants, discussed with them the need to locate and gather pertinent paper and electronic documents. Schack and Hopkins searched the computer system in Schack’s new office and informed Mound Cotton that they had failed to locate any electronic files or folders that pertained to Phoenix or SRC. They did not search the servers, however, as Schack was unaware that there was any pertinent information on them. The SRC Defendants also advised Mound Cotton that “because SRC was no longer in operation, there were no computers or electronic document collections to look through or search.” Mound Cotton attorneys reviewed hard copy materials made available by the SRC Defendants and subsequently produced these documents, about fifty boxes in all, to Phoenix in December 2005.

Basic question: if you didn’t search the servers, how did you know they didn’t contain pertinent information?

Around late February or early March 2006, a freelance computer technician, Peter Pinti, made a service call to Schack’s office in response to complaints about a malfunctioning server. This server was one of the two that the SRC Defendants had taken with them from SRC’s Carnegie Hall Towers office. After directly accessing the hard drive on the server, Pinti discovered about 25 gigabytes of data-as much as 2500 boxes-stored in a dormant, partitioned section of the server. The computer system in Schack’s office was configured in such a way that the desktop workstations did not have a “drive mapping” to that partitioned section of the hard drive. In other words, “someone using a computer connected to that server could not ‘view’ or gain access to that section of the hard drive and would have no way of knowing of its existence.” Schack immediately contacted his attorneys and was instructed to download the information and deliver it to them. A few days later, Schack asked Pinti to back up the data. Pinti first downloaded the data onto DLT tapes but Mound Cotton’s technology vendor was unable to extract the data from the tapes. On March 13 or 14, Pinti again downloaded the data onto DVDs. The deadline for discovery set in the pre-trial scheduling order for this case was March 12, 2006. See Dkt. 27.

(citation omitted).

Well, I guess we can hope that the data isn’t “pertinent.” Now this is interesting, the judge calls the unmapped partition dormant and even comes close to calling it “inaccessible” above. In fact, he later concludes that the partition fits the definition of “not reasonably accessible.” Read this:

The Introduction to the proposed amendments to Rule 26(b)(2) identifies as a difficult-to-access source “legacy data that remains from obsolete systems and is unintelligible on the successor systems.” Pending Rules Amendments, at 40. The information on the server in this case, which is in a partitioned section of the hard drive and not accessible from Schack’s newly configured computer system, fits squarely within this description.

Bull! An unmapped partition is easily accessible. But the point is, Phoenix’s counsel could not have adequately explained this. This conclusion was something in the nature of a mitigating factor. So whatever the penalty, keep in mind that it could be worse. This also illustrates the need for network topology maps and standardized procedures for storing data. Lay on, MacDuff!

Mound Cotton received the DVDs on March 15, 2006, and tried to review the documents quickly for privilege, relevance, and responsiveness. On March 20, 2006, Mound Cotton alerted Phoenix to the recently discovered documents and advised that it would inform Phoenix of the nature of the documents “as soon as [it] knew more about [them].” Between March 20 and April 10, 2006, counsel for Phoenix and the SRC Defendants met almost daily at depositions being taken in the case and discussed the status of the production. They also corresponded about the production. On April 10, 2006, SRC responded to Phoenix’s prior discovery requests that all responsive documents had been produced. On April 12, 2006, Mound Cotton informed Phoenix that it would produce the documents in “TIFF” format but Phoenix rejected that format. On April 13, 2006, Mound Cotton told Phoenix that it would provide the documents in an electronically searchable “Case Vault” format. Phoenix did not respond to this offer.

(citations omitted).

Evidently, hoping didn’t work. Phoenix goes on to be so uncooperative as to seek sanctions against SRC. The court decides against issuing an adverse inference instruction to the jury, both for the abandonment of the workstations and the late production of the unmapped partition. About the abandonment, the court says:

Nonetheless, because actual notices of the pending litigations are unavailable, and because of the upheaval in the defendants’ business, I do not find this instance to be one in which gross negligence alone supports an inference that the abandoned evidence was unfavorable to the SRC Defendants.

The court was not so forgiving with respect to the manner in which Mound Cotton (SRC’s counsel) conducted its search for relevant documents:

It appears that Mound Cotton never undertook the more methodical survey of the SRC Defendants’ sources of information that Judge Scheindlin outlined in Zubulake V. Mound Cotton simply accepted the defendants’ representation that, because SRC was no longer in operation, there were no computers or electronic collections to search. Had Mound Cotton been diligent, it might have asked-as it should have-what had happened to the computers SRC used at Carnegie Hall Towers.

It also wasn’t happy with SRC’s investigation. Ultimately, the court decides against any of the more stronger remedies available, and instead fines client and counsel $30,000 each. That had to be a shock for counsel, and an unwelcomed occurrence for SRC. All because of a store of invisible data, that was not to be found on any mapped partition…

Phoenix Four, Inc. v. Strategic Resources Corp., 2006 WL 1409413 (S.D.N.Y. May 23, 2006).


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