In the seminal decision of Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs, No. 05-9016, 2010 U.S. Dist. LEXIS 1839 (S.D.N.Y. Jan. 15, 2010) the Honorable Shira A. Scheindlin set forth a textbook step-by-step analysis for imposing sanctions for failing to properly implement a litigation hold involving the preservation and collection of ESI.

Click here for a copy of the original opinion issued on 1-11-10.

Click here for a copy of the corrections to the orginal opinion issued on 1-15-10.

Click here for a copy of the amended opinion issued on 1-15-10.

Click here for a copy of the amended opinion issued on 5-28-10

Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs, No. CIV. 05-9016, 2010 U.S. Dist. LEXIS 1839 (S.D.N.Y. Jan. 15, 2010).

The facts in this investor related action disclose that the defendants, who were connected to a hedge fund that lost money, sought sanctions against the plaintiffs for failing to preserve and produce documents, including ESI, and for submitting false declarations regarding their collection and production efforts.

The Court in this lengthy opinion addresses the issues of “how to define negligence, gross negligence, and willfulness in the discovery context and what conduct falls in each of these categories.”  In addition, after reviewing the law “governing the imposition of sanctions for a party’s failure to produce relevant information during discovery” the Court summarizes the facts “regarding the discovery efforts - or lack thereof - undertaken by each of the thirteen plaintiffs” against who sanctions are sought. The Court concludes by finding that “all of these plaintiffs were either negligent or grossly negligent in meeting their discovery obligations” and sanctions were imposed.

In arriving at her decision, the Court analyzed the following concepts:

1.       “[P]laintiffs' level of culpability -- that is, was their conduct of discovery acceptable or was it negligent, grossly negligent, or willful.”

As to the level of culpability, she states, “that negligence involves unreasonable conduct in that it creates a risk of harm to others, but willfulness involves intentional or reckless conduct that is so unreasonable that harm is highly likely to occur.”

The Court applied these concepts in the discovery chronological process.

[T]he first step in any discovery effort is the preservation of relevant information.  The Court, in referring back to the Zubulake IV decision, Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003), held that “definitely after July, 2004 . . . the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.” (emphasis supplied).

The next step in the discovery process is collection and review. . . . For example, the failure to collect records - either paper or electronic - from key players constitutes gross negligence or willfulness as does the destruction of email or backup tapes after the duty to preserve has attached. By contrast, the failure to obtain records from all employees (some of whom may have had only a passing encounter with the issues in the litigation), as opposed to key players, likely constitutes negligence as opposed to a higher degree of culpability. Similarly, the failure to take all appropriate measures to preserve ESI likely falls in the negligence category. These examples are not meant as a definitive list. Each case will turn on its own facts and the varieties of efforts and failures is infinite.

2.       “[T]he interplay between the duty to preserve evidence and the spoliation of evidence.”

In commenting upon the duty to preserve and spoliation, the Court stated,

The common law duty to preserve evidence relevant to litigation is well recognized. The case law makes crystal clear that the breach of the duty to preserve, and the resulting spoliation of evidence, may result in the imposition of sanctions by a court because the court has the obligation to ensure that the judicial process is not abused.

Further, as to the duty to preserve the Court noted,

It is well established that the duty to preserve evidence arises when a party reasonably anticipates litigation. “’[O]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.’” A plaintiff's duty is more often triggered before litigation commences, in large part because plaintiffs control the timing of litigation. (emphasis supplied).

3.       “[W]hich party should bear the burden of proving that evidence has been lost or destroyed and the consequences resulting from that loss.”

In addressing this third issue, the Court noted:

The third preliminary matter that must be analyzed is what can be done when documents are no longer available. This is not an easy question. It is often impossible to know what lost documents would have contained. At best, their content can be inferred from existing documents or recalled during depositions. But this is not always possible. Who then should bear the burden of establishing the relevance of evidence that can no longer be found? And, an even more difficult question is who should be required to prove that the absence of the missing material has caused prejudice to the innocent party.

The burden of proof question differs depending on the severity of the sanction. For less severe sanctions - such as fines and cost-shifting - the inquiry focuses more on the conduct of the spoliating party than on whether documents were lost, and, if so, whether those documents were relevant and resulted in prejudice to the innocent party. As explained more thoroughly below, for more severe sanctions - such as dismissal, preclusion, or the imposition of an adverse inference - the court must consider, in addition to the conduct of the spoliating party, whether any missing evidence was relevant and whether the innocent party has suffered prejudice as a result of the loss of evidence. . . .

It is not enough for the innocent party to show that the destroyed evidence would have been responsive to a document request. The innocent party must also show that the evidence would have been helpful in proving its claims or defenses - i.e., that the innocent party is prejudiced without that evidence. Proof of relevance does not necessarily equal proof of prejudice.

Relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligent manner. . . . However, when the spoliating party was merely negligent, the innocent party must prove both relevance and prejudice in order to justify the imposition of a severe sanction.  The innocent party may do so by “adduc[ing] sufficient evidence from which a reasonable trier of fact could infer that ‘the destroyed [or unavailable] evidence would have been of the nature alleged by the party affected by its destruction.’” “In other words, the [innocent party] must present extrinsic evidence tending to show that the destroyed e-mails would have been favorable to [its] case.” “Courts must take care not to ‘hold[ ] the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence,’because doing so ‘would . . . allow parties who have . . . destroyed evidence to profit from that destruction.’”

No matter what level of culpability is found, any presumption is rebuttable and the spoliating party should have the opportunity to demonstrate that the innocent party has not been prejudiced by the absence of the missing information. If the spoliating party offers proof that there has been no prejudice, the innocent party, of course, may offer evidence to counter that proof. While requiring the innocent party to demonstrate the relevance of information that it can never review may seem unfair, the party seeking relief has some obligation to make a showing of relevance and eventually prejudice, lest litigation become a “gotcha” game rather than a full and fair opportunity to air the merits of a dispute. If a presumption of relevance and prejudice were awarded to every party who can show that an adversary failed to produce any document, even if such failure is completely inadvertent, the incentive to find such error and capitalize on it would be overwhelming. This would not be a good thing.

To ensure that no party's task is too onerous or too lenient, I am employing the following burden shifting test: When the spoliating party's conduct is sufficiently egregious to justify a court's imposition of a presumption of relevance and prejudice, or when the spoliating party's conduct warrants permitting the jury to make such a presumption, the burden then shifts to the spoliating party to rebut that presumption. The spoliating party can do so, for example, by demonstrating that the innocent party had access to the evidence alleged to have been destroyed or that the evidence would not support the innocent party's claims or defenses. If the spoliating party demonstrates to a court's satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction might still be required.

In summary, the Court stated, “[i]n short, the innocent party must prove the following three elements: that the spoliating party (1) had control over the evidence and an obligation to preserve it at the time of destruction or loss; (2) acted with a culpable state of mind upon destroying or losing the evidence; and that (3) the missing evidence is relevant to the innocent party's claim or defense.”

4.     “[T]he appropriate remedy for the harm caused by the spoliation.”

In addressing the issue of the appropriate remedy, the Court noted:

The remaining question is what remedy should the court impose. “The determination of an appropriate sanction for spoliation, if any, is confined to the sound discretion of the trial judge and is assessed on a case-by-case basis.” Where the breach of a discovery obligation is the non-production of evidence, a court has broad discretion to determine the appropriate sanction.  Appropriate sanctions should “(1) deter the parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore ‘the prejudiced party to the same position [it] would have been in absent the wrongful destruction of evidence by the opposing party.’”

It is well accepted that a court should always impose the least harsh sanction that can provide an adequate remedy. The choices include - from least harsh to most harsh - further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal (terminating sanctions). The selection of the appropriate remedy is a delicate matter requiring a great deal of time and attention by a court.

In this case, the Court imposed an adverse inference sanction and stated:

Instead, the appropriate sanction here is some form of an adverse inference instruction that is intended to alleviate the harm suffered by the Citco Defendants. Like many other sanctions, an adverse inference instruction can take many forms, again ranging in degrees of harshness. The harshness of the instruction should be determined based on the nature of the spoliating party's conduct -- the more egregious the conduct, the more harsh the instruction.

In its most harsh form, when a spoliating party has acted willfully or in bad faith, a jury can be instructed that certain facts are deemed admitted and must be accepted as true. At the next level, when a spoliating party has acted willfully or recklessly, a court may impose a mandatory presumption. Even a mandatory presumption, however, is considered to be rebuttable.

In summary, the Court noted:

First, I stress that at the end of the day the judgment call of whether to award sanctions is inherently subjective. A court has a “gut reaction” based on years of experience as to whether a litigant has complied with its discovery obligations and how hard it worked to comply. Second, while it would be helpful to develop a list of relevant criteria a court should review in evaluating discovery conduct, these inquiries are inherently fact intensive and must be reviewed case by case. Nonetheless, I offer the following guidance.

After a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence. Thus, after the final relevant Zubulake opinion in July, 2004, the following failures support a finding of gross negligence, when the duty to preserve has attached: to issue a written litigation hold; to identify all of the key players and to ensure that their electronic and paper records are preserved; to cease the deletion of email or to preserve the records of former employees that are in a party's possession, custody, or control; and to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily accessible sources.

Finally, I note the risk that sanctions motions, which are very, very time consuming, distracting, and expensive for the parties and the court, will be increasingly sought by litigants. This, too, is not a good thing. For this reason alone, the most careful consideration should be given before a court finds that a party has violated its duty to comply with discovery obligations and deserves to be sanctioned. Likewise, parties need to anticipate and undertake document preservation with the most serious and thorough care, if for no other reason than to avoid the detour of sanctions.

The Court in an extensive discussion of the facts recounted the plaintiff’s efforts to preserve and produce ESI.  The Court found the counsel’s initial instructions to their clients did not meet the standard for a litigation hold and stated,

This instruction does not meet the standard for a litigation hold. It does not direct employees to preserve all relevant records -- both paper and electronic -- nor does it create a mechanism for collecting the preserved records so that they can be searched by someone other than the employee. Rather, the directive places total reliance on the employee to search and select what that employee believed to be responsive records without any supervision from Counsel. Throughout the litigation, Counsel sent plaintiffs monthly case status memoranda, which included additional requests for Lancer-related documents, including electronic documents. But these memoranda never specifically instructed plaintiffs not to destroy records so that Counsel could monitor the collection and production of documents.

In applying these legal principles, the Court found the “triggering date” for the duty to preserve by April, 2003, thought the duty to issue a “written” litigation hold may not have been so well established at that time.

In addition to citing to documents not produced by the plaintiff's, the defendants argued that the Court should assume “that each plaintiff also received or generated documents that have not been produced by anyone and are now presumed to be missing. Plaintiffs call such a request ‘absurd’ and argue that any such inference would be based on no more than ‘rank speculation.’”  However, the Court found that “[t]he paucity of records produced by some plaintiffs and the admitted failure to preserve some records or search at all for others by all plaintiffs leads inexorably to the conclusion that relevant records have been lost or destroyed.”

The Court went on to find that, “some of the "plaintiffs . . . were grossly negligent, [and, therefore] . . . that the Citco Defendants have ‘adduced enough evidence’ that plaintiffs have failed to produce relevant documents and that the Citco Defendants have been prejudiced as a result. Thus, a jury will be permitted to presume, if it so chooses, both the relevance of the missing documents and resulting prejudice to the Citco Defendants, subject to the plaintiffs' ability to rebut the presumption to the satisfaction of the trier of fact.

In the last part of the opinion, the Court set forth the adverse inference instruction that would be given to the jury.

Finally, the Court noted, “[w]hile litigants are not required to execute document productions with absolute precision, at a minimum they must act diligently and search thoroughly at the time they reasonably anticipate litigation. All of the plaintiffs in this motion failed to do so and have been sanctioned accordingly.”