This Sidley Update addresses the following recent developments and court decisions involving e-discovery issues:
- a United States Court of Appeals for the Tenth Circuit decision affirming the district court’s dismissal with prejudice of an amended complaint as a sanction for plaintiffs’ submission and refusal to withdraw a fraudulently altered email purporting to substantiate their claims
- a Northern District of Illinois order requiring as part of an electronically stored information (ESI) protocol for keyword searching that the producing party review a sample of documents not identified as responsive, also known as the “null set,” and produce any responsive documents
- a Northern District of California decision letting a party take discovery from an internet service company pursuant to 28 U.S.C. § 1782, which allows discovery in the United States for use in a foreign proceeding
- a Pennsylvania Bankruptcy Court ruling that debt resulting from a judgment ordered as a sanction for willful and malicious discovery conduct was dischargeable if based on the underlying claim but not if it arose as a result of the willful and malicious conduct
1. In King v. Fleming, 2018 WL 3863326 (10th Cir. Aug. 15, 2018), the United States Court of Appeals for the Tenth Circuit affirmed the district court’s dismissal with prejudice of an amended complaint as a sanction for plaintiffs’ submission and refusal to withdraw a fraudulently altered email purporting to substantiate their claims.
A group of Kansas citizens sought to remove a number of state judges from office for alleged bias. They sponsored a radio advertisement requesting signatures to remove the judges, but the radio station pulled the advertisement the next day for unspecified reasons. Some of the group suspected that the judges they had criticized were behind this decision, and they retained a lawyer to represent them in a lawsuit against the judges. The plaintiffs filed a complaint alleging various counts against the judges, the radio station and one of the station’s owners, then filed an amended complaint some three months later, which the defendants moved to dismiss. Id. at *1.
Instead of filing a response brief, however, the plaintiffs filed a second amended complaint without obtaining leave of court, which added some factual allegations and what it called the “unofficial version” of an email to one of the radio station’s owners, Bill Wachter, who was added as a defendant. The unauthorized complaint asserted that defendant Judge Lori B. Fleming had written an email from her official email account to Wachter to convince him to pull the advertisement. The “unofficial version” of the email was a picture of a crumpled printout of an email with superimposed bracketed text purporting to describe missing content. In the brackets was a direction purportedly from Judge Fleming to “get it [i.e., the advertisement] off” the air.
After some wrangling about the unauthorized complaint, the district judge presiding over the lawsuit eventually granted one of the plaintiffs leave to file a third amended complaint. The district judge allowed only three of the claims go forward: a Section 1983 allegation that defendants had violated the remaining plaintiff’s first amendment rights, a state-law breach-of-contract claim against the station and a state-law claim for tortious interference with contractual relations against the defendant judges. The presiding judge’s order relied on the contents of the “unofficial version” of Judge Fleming’s email in concluding that the remaining plaintiff had stated a colorable claim and allowed the plaintiffs to file a third amended complaint that complied with his rulings.
The plaintiffs filed the third amended complaint, and the defendant judges sent plaintiffs’ attorney a Rule 11 safe-harbor letter explaining that the Judge Fleming email had been altered and was misleading to the point of being fraudulent and warned that they would seek Rule 11 sanctions if the plaintiffs’ counsel did not withdraw the third amended complaint. Plaintiffs’ counsel and the remaining plaintiff refused, and the judges filed the Rule 11 sanctions motion. The remaining plaintiff and his counsel argued that they believed that the email was an accurate reconstruction of the actual email, submitting a series of affidavits to that effect, and claiming that the brackets were “just a demonstration” that was “closer to the truth.” Id. at *4.
The district court granted the motion for sanctions, concluding that the email was fraudulent and criticizing plaintiffs’ counsel for failing to engage in a reasonable inquiry. As a remedy, the district court struck the complaint, dismissing all of the remaining allegations with prejudice and awarded defendants their costs and fees. The remaining plaintiff filed a motion seeking to amend the order and requesting a forensic examination of the underlying email, but the district judge denied the request and issued an order awarding attorneys’ fees and costs based on affidavits by defendants’ counsel with $6,150 to Judge Fleming and $12,000 to the radio station defendants, noting that this amount “sufficed to deter future misconduct.” Id. at *5.
In considering the plaintiffs’ arguments on appeal, the Tenth Circuit applied an “abuse of discretion” standard and found that the district court had acted within its discretion and upheld the district court’s rulings. Applying this standard, the Tenth Circuit rejected plaintiffs’ claim that additional discovery in terms of a forensic analysis was necessary and could have changed the outcome of the case. Judge Gregory Phillips noted that the district court’s findings did not rest on its opinion of the truth of the claims made in the email but rather on the fact that the plaintiffs had attached a manipulated document to their pleadings without performing a reasonable inquiry, a judgment that was well within the district court’s discretion. Id. at *5-*6.
As to plaintiffs’ claims about the imposition of sanctions, the court of appeals explained that Rule 11(b) requires the attorney filing a paper before a federal court to certify to the best of his or her knowledge that the filing is not being made for an improper purpose. The court of appeals noted that the district court had carefully concluded that plaintiffs’ counsel had not made any inquiries into the veracity of the “unofficial version” of the email, despite strong indications that the email was fraudulent, and that he nevertheless relied heavily on that email in the relevant complaints and misleadingly quoted from it in pleadings without any qualifiers. Further, even after he received the safe-harbor letter, plaintiffs’ counsel refused to withdraw the pleading and flatly denied the defendants’ claim that he had not conducted any inquiry. Finally, the appellate court cited the district court’s finding that plaintiffs’ counsel’s request for a forensic examination demonstrated that he had failed to make a reasonable inquiry and had failed to respond reasonably to the safe-harbor letter. Id. at *6-*7.
The appellate court also rejected plaintiffs’ arguments that the district court wrongfully dismissed both the federal and state claims with prejudice. Judge Phillips, acknowledging that dismissal with prejudice was an “extreme” sanction that “isn’t a step to be taken lightly,” noted that such dismissal is an option because “district court judges need to be able to control their courtrooms.” Id. at *7. The court applied the nonexclusive, five-factor inquiry set forth in Chavez v. City of Albuquerque, 402 F.3d 1039, 1044 (10th Cir. 2005): (1) the degree of actual prejudice to the defendant caused by the misconduct, (2) the amount of interference with the judicial process, (3) the culpability of the litigant, (4) whether the court warned the litigant that dismissal of the action would be a likely sanction for noncompliance and (5) the efficacy of lesser sanctions. Id. at *7.
The Tenth Circuit concluded that all five factors supported the district court’s decision to dismiss the claims with prejudice. The prejudice to defendants was substantial — the only reason the claims had been allowed to go forward at all was because the court had relied on pleadings based on the fabricated claims in the “unofficial version” of the email. The interference was also substantial — in the view of the Tenth Circuit, “[i]t is hard to imagine how presenting falsified evidence to a federal district court would not interfere with the judicial process,” Id. at *9 (emphasis in original). The culpability was significant given plaintiffs’ counsel’s “full speed ahead” — rather than “stop and think” — approach and the fact that he knowingly presented rank speculation as fact. The notice received in the Rule 11 letter was sufficient warning. And the district court had good reason for preferring dismissal over a lesser sanction given the knowing manipulation of evidence and plaintiffs’ counsel’s history of noncompliance with procedural rules. Id. at *7-*11.
The court of appeals also rejected plaintiffs’ argument that it was an abuse of discretion to dismiss the state law claims with prejudice. The Tenth Circuit acknowledged that dismissal of the federal claims ordinarily results in dismissal of the state-law claims without prejudice but pointed out that this was not an ironclad rule and was to be resolved based on consideration of “the values of judicial economy, convenience, fairness, and comity.” Id. at *11 (citation omitted). The court of appeals concluded that the district court acted within its discretion in dismissing both the federal and state claims with prejudice as a sanction. Finally, the Tenth Circuit rejected plaintiffs’ arguments challenging the award of attorneys’ fees to the defendants.
2. In City of Rockford v. Mallinckrodt ARD INC., 2018 WL 3766673 (N.D. Ill. Aug. 7, 2018), Magistrate Judge Iain D. Johnston ordered that as part of an ESI protocol for keyword searching, the producing party would review a sample from the set of documents that were not identified as responsive, also known as the “null set,” and produce any responsive documents.
In this litigation, plaintiffs alleged antitrust and racketeering claims against defendants in connection with a drug for infants suffering from seizure disorders. The magistrate judge stated that this was a case of asymmetrical discovery obligations where defendant’s production of documents would be “astronomically larger” than plaintiff’s. He noted that the parties had worked cooperatively on discovery issues, were to be “commended for this cooperation,” and pointed out that this case was a “solid example that zealous advocacy is not necessarily incompatible with cooperation.” Id. at *1.
The parties began negotiating a protocol for the production of ESI and agreed that they would use keyword searches to identify and cull documents for review and production. As part of the protocol, the parties agreed to discuss search methodologies and expected to reach agreement on search terms, date restrictions and custodian restrictions. Id. at *2. Before implementing search terms, the producing party would provide the requesting party with a list of proposed search terms and would discuss additional search terms proposed by the requesting party. The producing party would also provide a hit report to the requesting party. If there was disagreement about a specific search term, the producing party could agree to review a statistically valid sample of documents being returned by that term, and any unresolved disputes over search terms would be submitted to the court for resolution.
As part of the protocol, the parties could not agree on what steps the producing party might have to take postproduction. Defendants proposed that if a requesting party reasonably believes that categories of requested documents were not produced, the parties would meet and confer to discuss potential additional search terms. Plaintiff proposed that the producing party would review a random sample of the “null set,” which “is the set of documents that are not returned as responsive by a search process, or that are identified as not relevant by a review process.” Id. (quoting M. Grossman & G. Cormack, The Grossman-Cormack Glossary of Technology-Assisted Review, 7 Fed. Cts. L. Rev. 1, 25 (2013)). Reviewing the null set allows the parties to determine “elusion,” the fraction of documents that were identified as nonresponsive — either because they did not hit on a search term or were marked nonresponsive during review — that are, in fact, responsive. Plaintiff proposed that the producing party review a statistically random sample of the null set calculated using a 95 percent confidence level and a 2 percent margin of error.
The parties ended up submitting their proposed language for the protocol to Magistrate Judge Johnston for resolution. Magistrate Judge Johnston began by noting that with any document retrieval process, including keyword searches, “without doubt, relevant documents will be produced, and without doubt, some relevant documents will be missed and not produced.” Id. at *4.
Magistrate Judge Johnston first held that plaintiff’s proposal for a review of the null set was reasonable under Rule 26(g). Under that rule, parties responding to discovery responses certify that “to the best of counsel’s knowledge, information, and belief formed after a reasonable inquiry, the disclosure is complete and correct at the time it was made.” Id. at *3. Though null set sampling is traditionally part of process for predictive coding and used to validate the predictive coding model, Magistrate Judge Johnston concluded that null set sampling could also be used to validate keyword searches. Because null set sampling can determine whether keyword searches are identifying responsive documents, the process is reasonable under Rule 26(g).
Magistrate Judge Johnston next found that plaintiff’s proposal for a review of the null set was proportional to the needs of the case under Rule 26(b)(1). Id. at *5. Defendants argued that null set sampling would be expensive and burdensome but failed to provide any evidence to support this contention. Magistrate Judge Johnston noted that he understood that random sampling would not require voluminous review in a case of this magnitude but would allow defendants to submit more evidence in the future if that is not the case.
Considering the other proportionality factors under Rule 26(b)(1), Magistrate Judge Johnston found that null set sampling was appropriate in this case. He emphasized that (1) the issues at stake in the case were large because of the antitrust and racketeering claims relating to a producer of medicine for children with a rare disorder; (2) the potential amount in controversy was “extraordinary,” particularly in light of the damage awards available for antitrust and racketeering claims; (3) defendants had access to the vast majority of relevant information; (4) defendants had substantial resources; (5) ESI would play a key role in resolving issues in the case; and (6) the burden and expense did not outweigh the likely benefit of ensuring reasonable document responses.
Finally, Magistrate Judge Johnston noted that if after reviewing the null set, a requesting party seeks more documents and the parties cannot resolve the dispute, he would review the dispute, apply the proportionality principles in Rule 26(b)(1), and might be open to considering cost shifting. Id. at *6.
3. In In re Ex Parte Application of Levi Strauss & Co., 2018 WL 3872790 (N.D. Cal. Aug. 15, 2018), Magistrate Judge Jacqueline Scott Corley allowed a party to take discovery from an internet service company pursuant to 28 U.S.C. § 1782, which allows discovery to be taken in the United States for use in a foreign proceeding.
The underlying dispute in this case began during mid-2000 trademark litigation between Levi Strauss & Co. and German retail chain New Yorker S.H.K. GmbH (New Yorker) concerning the distinctive stitching pattern Levi Strauss uses on the back pockets of its jeans. The parties settled in 2006 and agreed that any further use of the stitching pattern by New Yorker would incur a €50 penalty per garment. Under the settlement agreement, all disputes were to be brought in Brussels, Belgium.
In 2010, Levi Strauss sued New Yorker for violation of the settlement agreement. The Brussels court agreed and entered a provisional judgment against New Yorker in the amount of €1.25 million. In 2014, Levi Strauss filed a second action alleging additional violations of the settlement agreement. The court in Brussels again agreed and appointed an expert to determine how many garments had been sold in violation of the settlement agreement. New Yorker submitted that it had sold only 3,507 such jeans, but Levi Strauss turned to the Wayback Machine, a webpage that allows the public to view billions of old webpages from millions of websites and sought to use this tool to view earlier versions of New Yorker’s website. When Levi Strauss attempted this, however, Levi Strauss found an error message stating, “This URL has been excluded from the Wayback Machine.” Id. at *2. According to the Wayback Machine’s FAQ page, individuals can request that a site be excluded from the Wayback Machine.
Levi Strauss suspected that New Yorker had made such a request, and it filed the ex parte application at issue in this proceeding, requesting permission to issue a subpoena to obtain information from the Internet Archive, Wayback Machine’s owner, regarding whether New Yorker had sought to remove the relevant pages as well as the copies of those pages in the Internet Archive’s possession.
In reviewing the issue, Magistrate Judge Corley began her analysis by setting forth the standard under Section 1782:
A litigant in a foreign action qualifies as an “interested person” under Section 1782.... [A]ll that is necessary is that a “dispositive ruling” by the foreign adjudicative body is “within reasonable contemplation.” When it comes to requests directly from foreign courts, district courts typically handle Section 1782 discovery requests in the context of an ex parte application for an order appointing a commissioner to collect the information.
She noted that a district court has wide discretion and is not limited by the discovery rules applicable to U.S. litigation or the foreign court’s law. Instead, the court must consider the following four factors:
- whether the person from whom discovery is sought is a participant in the foreign proceeding
- the nature of the foreign tribunal, the character of the proceedings underway abroad and the receptivity of the foreign government or the court or agency abroad to U.S. federal court judicial assistance
- whether the request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States
- whether the request is unduly intrusive or burdensome. Id. at *3 (citations and quotation marks omitted)
The overarching goal is to provide efficient assistance to participants in foreign litigation and to encourage foreign jurisdictions to be equally cooperative in assisting U.S. courts.
In this case, the magistrate judge concluded that the application met the statutory requirements. Levi Strauss had filed in the proper forum (the Internet Archive’s principal place of business is San Francisco), its request was for use in a proceeding before a foreign tribunal, Levi Strauss was an “interested person” under the statute with a “reasonable interest” in the obtaining judicial assistance, and an ex parte request was appropriate under the circumstances.
The magistrate judge also found good cause to exercise her discretion to authorize the discovery. The Internet Archive was not a party in the Belgian case, and discovery was therefore otherwise unobtainable from it; there was a significant need for the information, as Levi Strauss had been unable to otherwise obtain the information sought; and she believed that “the Belgian court would be receptive to an order from this Court regarding the information sought here,” especially as there was no indication that the application was an end run around otherwise applicable discovery strictures. Finally, she concluded that the discovery sought did not appear to be unduly burdensome.
The Magistrate Judge therefore granted the application, stating that the information could be used for the sole purpose of advancing the Belgian proceedings. As this was an ex parte proceeding, however, she ordered Levi Strauss to serve New Yorker with a copy of the order and gave New Yorker 21 days to file a motion contesting the subpoena. She ordered the Internet Archive to preserve the information sought pending resolution of any objection by New Yorker and ordered that the return date of the subpoena be set after the expiration of the 30-day period to allow the Internet Archive to contest the subpoena if appropriate.
4. In In re Catalan, 2018 WL 4354372 (Bankr. E.D. Pa. Sept. 11, 2018), Bankruptcy Judge Eric Frank ruled that debt resulting from a judgment ordered as a sanction for willful and malicious discovery conduct was dischargeable if based on the underlying claim but not if it arose as a result of the willful and malicious conduct.
In 2013, Vision West, Inc. sued Addison Dane, Inc. and Alan H. Catalan in state court alleging breach of contract. Due to discovery misconduct by both Addison Dane and Catalan, the state court entered default judgment against the pair in the amount of $132,832.11 ($79,620.08 due under the contract, $27,867.03 in additional damages, and $25,345.00 in attorney’s fees). Catalan then filed a Chapter 7 bankruptcy proceeding requesting that the debt resulting from the judgment be discharged. Vision West filed an adversary complaint seeking a determination that the debt was nondischargeable under 11 U.S.C. § 523(a)(6) and thereafter sought summary judgment. Id. at *1–*2.
Pursuant to 11 U.S.C. § 523(a)(6), debts incurred for “willful and malicious injury by the debtor to another entity or to the property of another entity” are nondischargeable. For purposes of this statute, malice requires only wrongful conduct that is without just cause or excuse; it does not require ill will. Therefore, the bankruptcy court stated it first had to determine the “true nature of the debt” in considering whether it was dischargeable: “the issue then boils down to a simple question: what did Vision West get when its motion for sanctions was granted by the State Court?” If the judgment was based solely on the underlying breach of contract claim, the debt would be dischargeable. If, however, the judgment created a sanction-based debt derived from a willful and malicious injury, such debt was nondischargeable. Id. at *4–*5.
To determine the nature of the debt, the court conducted a detailed analysis of Pa. R. Civ. P. 4019 pursuant to which the sanctions were issued. The bankruptcy court noted that when deciding whether to enter a sanction as severe as a default judgment, a court must consider the extent of the defaulting party’s willfulness or bad faith, among other factors. Because entry of a default judgment is such a drastic remedy, it occurs only in the most serious scenarios, as such an action cuts off a party’s right to present its case, essentially resulting in a default judgment on the underlying claim: “Sanctions judgments are treated according to the same rules as default judgments, and courts equate them.” Therefore, the court determined, the bulk of the debt was not a new debt but a default judgment on the underlying claim and therefore dischargeable. Id. at *5–*6.
The bankruptcy court then reviewed the portion of the award classified as attorney’s fees. The court looked again to Rule 4019, which allows for a shifting of reasonable expenses such as attorney’s fees to be paid by a sanctioned party. The court determined that such cost shifting created a new debt, distinct from the underlying debt. Therefore, if such debt was the result of willful and malicious conduct, it would be nondischargeable. Id. at *7. The court traced Catalan’s misconduct back to the pretrial conference, where he had first been informed of his obligation to produce documents, which he ultimately failed to produce. The court determined that attorney’s fees incurred by Vision West prior to this date were shifted by a contractual fee-shifting provision and were not the result of misconduct. The debt resulting from these fees was, therefore, dischargeable. Id. at *7–*8.
Fees incurred after the pretrial conference, on the other hand, were the direct result of Catalan’s discovery misconduct, as Catalan “knew of his court imposed discovery obligations and did not fulfill them.” Further, he knew that his failure to comply with these obligations would increase the opposing party’s costs, and “[t]he only reasonable inference to be drawn from these facts is that [Catalan] was acting in bad faith — in bankruptcy nomenclature, a voluntary action taken with a substantial certainty of producing injury.” Id. at *7-*8.
Judge Frank explained that he was characterizing the fees incurred after the pretrial conference as fees shifted under Rule 4019 — not as contractually shifted fees. To do otherwise would lead to “perverse consequences,” as the fee-shifting provision was meant to protect Vision West. For these reasons, the bankruptcy court determined that Catalan could not discharge this portion of the debt. Id. at *8.
Ultimately, the bankruptcy court found that each party was entitled to partial summary judgment — the $17,365 representing attorney’s fees incurred after the pretrial conference was the result of willful and malicious conduct and not dischargeable, while the rest of the debt represented “ordinary contractual obligations” dischargeable in bankruptcy. Id. at *8–*9.
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