December's Notable Cases and Events in E-Discovery

1. In Fairholme Funds, Inc. v. United States, 2017 WL 4768385 (Fed. Cl. Oct. 23, 2017), Judge Margaret M. Sweeney granted, over the government’s strenuous objection, plaintiffs’ motion to compel the “quick peek” production under Fed. R. Evid. 502(d) of approximately 1,500 documents withheld by a government defendant as privileged pursuant to the bank authorization and deliberative process privileges.

Plaintiffs challenged documents withheld by defendant as privileged pursuant to the bank authorization and deliberative process privileges, arguing for use of the “quick peek” procedure as authorized by Fed. R. Evid. 502, which provides for the production of documents without prior document review, subject to clawback of any privileged documents. Id. at *1. Plaintiffs claimed the quick peek procedure was the only way to ensure that they received all of the documents to which they were entitled, noting the several times during the course of discovery that plaintiffs had challenged privilege designations by defendant, with the subsequent production of those challenged documents after lengthy delays in a process that plaintiffs called “troubling.”

Defendant strongly objected, arguing that it would not consent to a quick peek and that it had already undertaken a comprehensive review of the challenged privileged materials. Id. at *2. Defendant also pointed out that the purpose of the quick peek as proposed by plaintiff was not the intended use of the rule, citing the Sedona Conference:

[Fed. R. Evid.] 502(d) does not authorize a court to require parties to engage in ‘quick peek’ … productions and should not be used directly or indirectly to do so. … Rule 502 was designed to protect producing parties, not to be used as a weapon impeding a producing parties’ right to protect privileged material. Compelled disclosure of privileged information, even with a right to later claw back the information, forces a producing party to ring a bell that cannot be un-rung. Id. (quoting The Sedona Conference, Commentary on Protection of Privileged ESI, 17 Sedona Conf. J. 99, 140 (2016)).

Defendant further argued that it could identify only one prior case in which such a procedure was compelled and that the quick peek in that proceeding was ordered as an alternative to sanctions for an insufficient privilege log and failure to cooperate, which were not alleged in this case. Fairholme Funds, 2017 WL 4768385, at *2.

Upon reviewing plaintiffs’ motion, the court first stated that the general purpose of Fed. R. Evid. 502 was to resolve disputes regarding inadvertent production and subject matter waiver of certain disclosures of communications or information protected by the attorney-client privilege or work product doctrine and to address complaints about the cost of protecting privileged materials. Id. at *4. The court observed that neither of these two issues was relevant to the current dispute. However, the court also noted that the advisory committee’s note on Fed. R. Evid. 502(d) specifically stated that “a confidentiality order is enforceable whether or not it memorializes an agreement among the parties to the litigation” and went on to discuss the parties’ protective order, which included a clawback provision for inadvertent production to be governed by Fed. R. Evid. 502(d). Id. at *5. 

Turning to the merits, the court placed heavy emphasis on defendant’s piecemeal productions and ruled that due to the court’s desire to facilitate the speedy and efficient conclusion of discovery, it would grant plaintiffs’ motion. Id. at *6. The court indicated that denial of the plaintiffs’ motion would likely lead plaintiffs to seek in camera review of the 1,500 documents. Given the court’s heavy caseload and limited resources, the quick peek procedure was a much more attractive option and would both relieve the court of the burden of in camera review and benefit the parties with a prompt resolution of the dispute. The court also noted that the Rule 502(d) procedure was helpful in this case because it would allow the parties to continue briefing the issues to allow the court to address the viability of the complaint. The court also pointed to the parties’ protective order in responding to defendant’s argument that the disclosure would ring a bell that could not be unrung, finding that the robust protective order in place, which limited access to protected information, provided sufficient protection. Id. at *7. Last, the court indicated that it was “unpersuaded” by defendant’s reference to the Sedona Conference and explained that its “sole purpose” for using the quick peek procedure was to end the dispute and move the case forward, which was appropriate in light of the court’s broad discretion and the parties’ “mutually-agreed-to protective order” already entered in the case.

Accordingly, the court ordered defendant to provide plaintiffs with the opportunity to review the 1,500 documents pursuant to a protocol set forth by the court.

2. In Ronnie Van Zant, Inc. v. Pyle, 2017 WL 3721777 (S.D.N.Y. Aug. 23, 2017), Judge Robert W. Sweet held that plaintiffs were entitled to an adverse inference with respect to unpreserved text messages exchanged between a screenwriter and a former member of the rock band Lynyrd Skynyrd.

In this litigation, several members of Lynyrd Skynyrd and their estates sought to enforce a 1988 consent order against defendants, a record label and a film company working on a movie chronicling the 1977 plane crash that killed several founding members of the band. Id. at *1. After the 1977 crash, the surviving members of the band entered into a “blood oath” to never perform as Lynyrd Skynyrd again. Ten years later, this blood oath led to a lawsuit when some members of the band wished to reunite for a tour under the Lynyrd Skynyrd name. To resolve that litigation, the band members entered into a consent order in 1988 providing, among other things, that there would be no exploitation of the history of Lynyrd Skynyrd without the prior written approval of certain band members. Id. at *2.

In 2016, defendants began working on a feature-length film based on the 1977 crash with the help of Artimus Pyle, the band’s former drummer and one of the signatories to the 1988 consent order. Id. at *4. Defendants hired a screenwriter who communicated with Pyle about the script via text messages. Id. at *5. Shortly after plaintiffs filed a lawsuit seeking to enjoin the film’s release based on the 1988 consent order, the screenwriter switched cell phone providers and acquired a new phone. Id. at *7. Although some data from the old phone was backed up, such as the screenwriter’s photos, the text messages exchanged with Pyle were not preserved.

In conjunction with a motion for a permanent injunction, plaintiffs moved for an adverse inference with respect to the unpreserved text messages based on Rule 37(e). Id. at *8. Under Rule 37(e)(1), a court may sanction a party “[i]f electronically stored information [ESI] that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery.” Where the party that failed to preserve ESI “acted with the intent to deprive another party of the information’s use in the litigation,” a court may “instruct the jury that it may or must presume the information was unfavorable to the party” or may “dismiss the action or enter a default judgment.” Fed. R. Civ. P. 37(e)(2).

Judge Sweet held that plaintiffs had shown they were entitled to an adverse inference based on defendants’ failure to preserve the text messages. Van Zant, 2017 WL 3721777, at *8. Judge Sweet noted that the screenwriter’s actions — getting a new phone after the litigation commenced and managing to back up other data besides the text messages — represented “the kind of deliberate behavior that sanctions are intended to prevent.” Id. at *10.

Defendants argued against the award of an adverse inference, stating that they could not be sanctioned under Rule 37(e) for the actions of the screenwriter, who was a nonparty and whose phone was not under defendants’ control. Id. at *8. Applying a broad conception of control, Judge Sweet concluded that the text messages “were, practically speaking, under [defendants’] control” because defendants contracted with the screenwriter to work on the film and worked closely with the screenwriter for over a year. Id. at *9. In addition, the screenwriter had a financial interest in the outcome of the litigation. Accordingly, Judge Sweet held that the messages should have been preserved for purposes of this litigation. Defendants also argued that plaintiffs had never issued the screenwriter a valid subpoena for the messages, but Judge Sweet found this argument to be irrelevant because Rule 37(e) requires “simply that the lost information ‘should have been preserved.’” Finally, defendants argued that plaintiffs had failed to demonstrate prejudice because plaintiffs could have requested the text messages from Pyle and because the messages were duplicative of other documents already produced. Judge Sweet noted that plaintiffs had sought the text messages from Pyle to no avail and that the text messages spoke directly to several of the key issues in the litigation.

3. In United States ex rel. Scutellaro v. Capitol Supply, Inc., 2017 WL 1422364 (D.D.C. Apr. 19, 2017), U.S. District Court of the District of Columbia Chief Judge Beryl A. Howell invoked the court’s inherent authority in awarding an adverse inference against a defendant for failure to preserve ESI in violation of a regulatory duty after concluding that Rule 37(e) sanctions were inapplicable because the documents had not been destroyed in anticipation of litigation.

In this qui tam proceeding, the government and relator Louis Scutellaro served defendant Capitol Supply, Inc. with numerous subpoenas and document requests over several years. Defendant failed to retain relevant data and therefore did not fully comply with these discovery requests. Id. at *1. Eventually, the court entered a conditional contempt order against defendant, at which time defendant admitted that it had overwritten and therefore lost certain relevant country of origin information prior to July 2009, and the only information it had subsequent to July 2009 was incomplete. In light of the defendant’s discovery failings, the government and relator filed motions for an adverse inference. Id. at *2.

In the motions, the government and relator argued that defendant failed to preserve “case-dispositive” country of origin evidence for the products it sold on a website and allowed the country of origin data to be overwritten after a short preservation period. Id. at *9. The relator alleged that defendant had a clear obligation to preserve this information under federal regulations and sought an adverse inference treating as nondesignated all products for which the country of origin was unknown due to the failure to preserve. The adverse inference would apply to over 250,000 transactions representing sales in excess of $223 million.

Defendant acknowledged that it had failed to preserve the data for products sold prior to July 2009 and preserved only some information for the period after July 2009, but it claimed that the court’s power to impose ESI spoliation sanctions stemmed from Rule 37(e) and not from the court’s inherent powers. Id. at *10. Defendant further argued that the government and relator had failed to make the showing required by Rule 37(e) to obtain an adverse inference.

In making its ruling, the court first stated that Fed. R. Civ. P. 37(e) applies to ESI that should have been preserved in the anticipation or conduct of litigation. The court made particular note of the rule’s commentary, which stated that courts should be cognizant of any independent requirement that the lost information be preserved, which requirement may arise from many sources, including administrative regulations. The court pointed out that in this case plaintiff was not arguing that defendant failed to preserve evidence in anticipation of litigation but instead claimed that defendant failed to preserve data in violation of defendant’s regulatory and contractual obligations. The court therefore concluded that while Rule 37(e) does not govern the instant spoliation motions, the court could still decide whether an adverse inference and sanctions would be proper pursuant to its inherent authority. The court ultimately ruled that an adverse inference instruction was appropriate, focusing specifically on the fact that defendant overwrote the data as part of its “practice for many years” and not accidentally or unknowingly. While the court ruled that an adverse inference instruction was appropriate, the form of the instruction would be addressed during pretrial motions in limine.

4. In City of Seattle v. ZyLAB North America, LLC, 2017 WL 4418636 (W.D. Wash. October 5, 2017), United States District Court Judge John C. Coughenour applied proportionality standards in addressing whether a party’s method of production can be a contract breach and resolving disputes regarding the relevance of prior contractual relationships and a party’s control over documents held by its corporate parent.

Plaintiff City of Seattle entered into a contract with defendant ZyLAB North America LLC pursuant to which defendant would provide plaintiff with various software services. Id. at *1. In March 2016, plaintiff terminated the contract because it believed defendant had not provided a system that met the contract’s specifications. The parties entered prelitigation mediation, during which plaintiff requested from defendant documents that plaintiff believed it was entitled to receive under the contract. Defendant refused to send plaintiff the documents and instead offered to allow plaintiff to visit defendant’s Virginia headquarters and take copies of the documents on a dedicated computer. Plaintiff viewed defendant’s proposed method of document production as another breach of the contract. In the litigation, plaintiff requested production of the same documents it had sought during mediation. Defendant still refused to produce any of the requested documents, and plaintiff filed a motion to compel.

The court first set forth the standards governing a motion to compel under Fed. R. Civ. P. 26(b)(1): “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case.” Id. at *2. When addressing proportionality, the court said it would consider “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.”

Applying this standard, the court addressed each of the discovery disputes. The first dispute was the applicable time period of discoverable documents. Plaintiffs demanded that defendant produce all responsive and nonprivileged documents for the period March 4, 2016, to May 5, 2017, but defendant asserted that it obtained counsel on March 4, 2016, and responsive documents after that date were protected by attorney-client privilege and the work product doctrine. The court noted that a party withholding materials based on privilege had the burden of proving that the withheld materials were actually privileged, and defendant’s argument that it obtained counsel on March 4, 2016, alone did not carry defendant’s burden to show that all responsive documents after that date were privileged. Id. at *3. The court also found that defendant did not make any showing that production of nonprivileged, responsive documents during this period would be disproportionately burdensome.

The second dispute was over defendant’s 50,000 audit documents compiled in response to plaintiff’s contractual audit request, the same documents defendant previously offered to allow plaintiff to review and copy at its Virginia headquarters. One of plaintiff’s contract breach claims was that defendant’s direction to plaintiff to review the documents in person at defendant’s Virginia headquarters was a breach of the contract and that defendant was required to produce the documents in electronic format and send them to plaintiff. Defendant argued that these documents had limited relevance and that review of the 50,000 documents would require “hundreds, if not thousands, of hours of attorney time.” The court noted that the plaintiff’s breach claim seemed less about the relevance of the documents and more about the method of their production. Noting that the documents appeared to have little relevance to the case and that some of these documents would be produced in response to other requests, the court ruled that it would not compel defendant to respond to plaintiff’s audit document request because any relevance of those documents was outweighed by the burden placed on defendant to produce them. Id. at *4.

The third dispute involved defendant’s documents related to similar, past contractual relationships with immixTechnology, Inc. (Immix) and the Central Puget Sound Regional Transit Authority (Sound Transit). Plaintiff asserted that these documents were relevant to its negligent misrepresentation and Consumer Protection Act claims because defendant stated during the contracting process that it had not previously had similar contracts or services terminated. It turned out that defendant had previously been a subcontractor for a similar project that was terminated between Immix and Sound Transit as well as a party to a licensing agreement with Sound Transit. Thus, plaintiff argued that defendant’s failure to disclose these past relationships prior to entering into its contract with plaintiff could give rise to liability. The court agreed that investigation of these documents could provide evidence that defendant, based on its past involvement with Immix and Sound Transit, was not completely forthcoming with plaintiff before it entered into the contract and ordered production of these documents. Id. at *5.

Finally, the court reviewed plaintiff’s demand for documents related to the contract in the possession of defendant’s parent corporation, ZyLAB BV. Defendant argued that it did not have legal control over documents in the possession of ZyLAB BV, nor could it force its corporate parent to provide responsive documents. Id. at *6. The court noted that under Fed. R. Civ. P. 34, “control” is defined as the legal right to obtain documents upon demand. The court was persuaded by the binding Ninth Circuit precedent that a U.S. subsidiary could not force its foreign parent to turn over documents in its possession in the absence of a contract or legal mechanism that provided the subsidiary with a right to the documents. Id. (citing In re Citric Acid Litig., 191 F.3d 1090, 1107-08 (9th Cir.); U.S. v. Int’l Union of Petroleum & Indus. Workers, AFL-CIO. 870 F.2d 1450 (9th Cir.)). Because plaintiff had not demonstrated that defendant had a contractual or legal relationship with parent ZyLAB BV such that defendant could force ZyLAB BV to turn over documents in its possession, the court denied plaintiff’s requests for documents held by ZyLAB BV. Id. at *7.