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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, http://www.uscourts.gov/rules/newrules6.html. 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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Posted in Data Management, Document Retention, Duty to Conduct a Reasonable Inquiry, Duty to Preserve, E-Discovery Pitfalls | Tagged: , | Leave a Comment »

Are back-up tapes inhererently inaccessible for purposes of e-discovery?

Posted by rjbiii on September 16, 2007

Data may be considered not reasonably accessible by reasons of hardware limitations. In general, litigation holds do not apply to inaccessible back-up tapes. Consolidated Aluminum Corp. v. Alcoa, Inc., 2006 WL 2583308, *2 (citing Zubulake IV, 220 F.R.D. at 218). Are all back up tapes inaccessible, by definition? The opinion in Alcoa stated that “accessible” back-up tapes should probably be included in any litigation hold. Id. From this perspective, then, back up tapes are not inherently inaccessible, but are merely presumptively so. What differentiates “accessible” back up tapes from tapes that are “inaccessible?” Active and frequent use of the tapes is apparently the key. Zubulake IV, 220 F.R.D. at 218 (stating that if backup tapes are accessible (i.e., actively used for information retrieval), then such tapes would likely be subject to the litigation hold.”). Another court ruled that:

[D]ata that is accessible is stored in a readily usable format that does [not?] need to be restored or otherwise manipulated to be usable. Conversely, data that is inaccessible is not readily useable and must be restored to an accessible state before the data is usable. Backup tapes are considered an inaccessible format, and, thus, shifting the costs of producing data from backup tapes may be considered.

Quinby v. WESTLB AG, No. 04Civ.7406(WHP)(HBP), 2006 WL 2597900, at *7 (S.D.N.Y. Sep. 5, 2006) (citing Zubulake v. UBS Warburg, LLC, 217 F.R.D. 309, 320 (S.D.N.Y.2003)).

Posted in 2nd Circuit, Back Up Tapes, Best Practices, Data Management, Document Retention, Reasonably Accessible, S.D.N.Y | 1 Comment »

One school district’s e-discovery challenge

Posted by rjbiii on September 14, 2007

Education Week has an article detailing one school district’s response to the challenges posed by law suits and data management:

[The district’s network manager] spent his days putting an electronic archiving system in place in response to revised rules from the U.S. Supreme Court regarding federal lawsuits. The rules, updated in December 2006, require companies, government agencies, school districts, and generally any organization that might be sued in federal court to have systems for retrieving electronic data such as e-mail correspondence if it is needed as evidence in a federal case.

That means districts need to develop policies and software systems for the storage of e-mail, instant messages, word processing documents, PowerPoint presentations, and any type of electronic file on a computer system. The new requirements have caught many districts by surprise, and school officials are now playing catch-up to adopt policies and make sure they have the needed software.

One driving force behind the district’s move was to “avoid an IT nightmare”:

“If you’re called upon to produce information on backup tapes, and you have to restore every set of backup tapes, that’s an IT nightmare,” says Michael Ivanov, the senior director of archiving at CommVault, an Oceanport, N.J.-based information-management company that provides e-mail archiving services, and whose clients include the Middletown district and the 20,000-student Moore, Okla., schools.

One Miami-based lawyer warns those districts who have not moved to shore up their own procedures and IT infrastructure:

While some districts, particularly smaller ones, may believe they don’t need to worry about the new rules that pertain to federal lawsuits, Lindsay, the Miami-based lawyer, says they should think again because state procedures typically take their cues from the federal courts. It’s only a matter of time, he says, before states begin adopting similar requirements regarding electronic content and lawsuits.

“The states haven’t adopted similar rules regarding electronic discovery yet, but they will,” he warns. “They all will.”

Changes to the FRCP were made to reflect changes in society, so state laws, if they haven’t already, will have to do likewise. These rules may not be identical to the Federal rules, but no court is going accept excuses in the place of competent execution of policies and implementation of appropriate technology.

Posted in Best Practices, Data Management, Discovery, Document Retention, Tools, Trends | Leave a Comment »

DataKos discusses e-mail tape backup and rotation schedules

Posted by rjbiii on September 12, 2007

In this post, DataKos looks for a silver bullet formula for tape storage and backup rotations:

Backup tapes should be used only for disaster recovery, but many organizations still use those media for archives, retention or storage, with a trend toward increased use of archive storage technologies. Archiving does not solve the information lifecycle challenges organizations face and the more information retained the more that is subject to collateral legal disclovery.

Another item to note: the more often you use tapes for archiving and restoring, the less likely a court will find those tapes “not reasonably accessible” for purposes of discovery. If you only restore in times of disaster or error, you will greatly decrease the chances of having to do costly and burdensome restore operations once litigation strikes.

Posted in Back Up Tapes, Data Management, Discovery, Document Retention, Duty to Preserve, email, Reasonably Accessible | Leave a Comment »

Case Summary: Quintus Corp.; Court grants default judgment in b/r trial where defendant was found to have destroyed evidence

Posted by rjbiii on September 6, 2007

In a bankruptcy trial where defendant had destroyed electronic files, evidence that “went to the heart of the Trustee’s suit,” for the purpose of clearing more drive space; where defendant had breached a contract and therefore knew that the files would be relevant to potential litigation, the court ruled that judgment should be entered in favor of the Trustee for all claims listed in the Debtors’ b/r schedules and on the claims register. Trustee’s motion seeking attorneys’ fees as well was denied because the court granted a more severe sanction. In re Quintus Corp. v. Avaya, Inc., 353 B.R. 77 (Bkrtcy. D. Del. 2006).

Posted in 3d Circuit, Bankruptcy Judge Mary A. Walrath, Case Summary, D. Del., Data Management, Document Retention, Duty to Preserve, Sanctions, Spoliation | Leave a Comment »

Case Summary: Tschirhart; Court grants a default judgment to plaintiff after finding defendant deliberately destroyed evidence

Posted by rjbiii on September 6, 2007

In a trial concerning copyright infringement by the user of peer-to-peer systems, the court granted plaintiff recording company a default judgment against defendant, concluding that defendant deliberately destroyed the evidence, music files that had resided on the hard drive of her computer, in bad faith. A forensics expert found that defendant had “wiped” the hard drive after notice of litigation and again after the court ordered defendant to produce the computer for a forensic examination. Defendant, while not disputing the deletion operations occurred, claimed that they occurred as a part of automated defragmentation operations. The court was not convinced. In addition to a finding of bad faith, the court also found that the three elements required by the Fifth Circuit to dismiss the case had been established. Specifically, the court concluded that: (1) the destruction of evidence was attributable to the client and not the attorney; (2) the destruction caused substantial prejudice to the opposing party; and (3) a less drastic sanction was not appropriate. The plaintiff’s motion for terminating sanctions was granted, while defendant was ordered to pay the amount of the costs and fees relating to the filing of the motion. Arista Records LLC v. Tschirhart, 241 F.R.D. 462 (W.D. Tex. 2006).

Posted in 5th Circuit, Case Summary, Computer Forensics, Data Management, Default Judgment, Document Retention, Duty to Preserve, Judge Orlando L. Garcia, Sanctions, W.D. Tex. | Leave a Comment »

Case Blurb: Easton Sports; Closing Yahoo! account violated duty to preserve

Posted by rjbiii on September 3, 2007

Defendant alleged to have stolen trade secrets before changing jobs found by court to have violated the duty to preserve relevant evidence after he closed his Yahoo! account, causing the destruction of all e-mails in that account and the loss of messages he had sent to that account while employed by plaintiff. The magistrate recommended that the Court allow:

  • Plaintiff to present evidence of Defendant’s failure to preserve the documents to the jury;
  • An instruction to the jury that it may presume, based upon the spoliation, that the evidence destroyed would have been favorable to Plaintiff;
  • Plaintiff’s counsel to argue in favor of the negative inference.

Easton Sports, Inc. v. Warrior Lacrosse, Inc., 2006 WL 2811261 (E.D. Mich. 2006).

Posted in 6th Circuit, Case Blurbs, Data Management, Document Retention, Duty to Preserve, E.D. Mich., Magistrate Judge Donald A. Scheer, Sanctions, Spoliation | Leave a Comment »

Case Blurb: Zubulake; Sanctions for Destroying Evidence Explained

Posted by rjbiii on August 29, 2007

A party can only be sanctioned for destroying evidence that it had a duty to preserve, and such duty arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation. Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 216 (S.D.N.Y.2003).

However, a corp. upon recognizing the threat of litigation, need not preserve every shred of paper, every e-mail or electronic document, and every backup tape. Id.

Instead, the duty to preserve extends to any documents or tangible things made by individuals “likely to have discoverable information that the disclosing party may use to support its claims or defenses.” Id.

The duty also extends to documents prepared for those individuals and to information that is relevant to the claims and defenses of any party, or which is relevant to the subject matter involved in the action. Id.

Thus, the duty to preserve extends to those employees likely to have relevant information, i.e. the “key players” in the litigation. Id.

Posted in 2nd Circuit, Case Blurbs, Document Retention, Duty to Preserve, Judge Shira A. Scheindlin, Key Players, Reasonable Anticipation of Litigation, S.D.N.Y, Spoliation | Leave a Comment »

Case Blurb: Leon; Willful Spoliation defined

Posted by rjbiii on August 28, 2007

A party’s destruction of evidence qualifies as willful spoliation if the party has “some notice that the documents were potentially relevant to the litigation before they were destroyed. Leon v. IDX Systems Corp., 464 F.3d 951 (9th Cir. 2006) (citing United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002)).

Posted in 9th Circuit, Case Blurbs, Document Retention, Duty to Preserve, Judge A. Wallace Tashima | Leave a Comment »

Case Blurb: Quintus Corp, selective preservation of documents prohibited

Posted by rjbiii on August 28, 2007

A party cannot selectively preserve “relevant documents and only present those that it finds favorable to its case, at a time when if finds it convenient. In re Quintus Corp. v. Avaya, Inc., 2006 WL 307982 (Bkrtcy. D. Del. 2006) (citing Shamis v. Ambassador Factors Corp., F.3d 879, 890 (D.C. Cir. 1995)).

Posted in 3d Circuit, Case Blurbs, D. Del., Document Retention, Duty to Preserve | Leave a Comment »