On January 11, 2010, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York entered an opinion advising businesses, litigants, and potential litigants to undertake preservation and collection of both paper and electronic documents with the most serious and thorough care to avoid the detour of sanctions resulting from discovery disputes.  On January 15, 2010, Judge Scheindlin issued an amendment to her opinion in which she clarified some important points included herein.  In Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC,[1]  Judge Scheindlin entered sanctions against the plaintiffs for failing to preserve and produce documents, and for submitting false and misleading declarations regarding their document collection and preservation efforts. Judge Scheindlin did not enter sanctions because of any purposeful or willful destruction of evidence, but because the plaintiffs negligently or grossly negligently failed to timely institute written litigation holds and monitor collection efforts after the duty to preserve arose, which resulted in the loss of many relevant documents.

Under Pension, not only can the failure to issue a written litigation hold constitute gross negligence, but also, as clarified in Judge Scheindlin's Amended Order, the failure to preserve back-up tapes that are the sole source of relevant information can constitute gross negligence.  In addition, in distinguishing between misconduct that is negligent, grossly negligent, or willful in the discovery context, Judge Scheindlin determined that the failure to collect records from key players constitutes gross negligence or willfulness, while the failure to obtain records from all employees is likely to constitute negligence.  Quite notably, Judge Scheindlin's recommendation that parties preserve and collect records from not only key players, but also from all employees, even if these persons "may have had only a passing encounter with the issues in the litigation," may deviate from her prior opinions.  

There is a common law duty to preserve evidence relevant to litigation, and the breach of this duty and the resulting spoliation of evidence may warrant the imposition of sanctions.  In Pension, Judge Scheindlin advised that once 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.  Without implementing such practice, parties run the risk of being subject to sanctions due to the loss of relevant documents, which could cause prejudice to the opposing party.  To prove relevance and prejudice, the innocent party must show 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 (3) that the missing evidence is relevant to the innocent party's claim or defense.  Relevance and prejudice may, however, be presumed by a court or jury when the spoliating party destroys evidence in bad faith or acts in a grossly negligent manner.  But, Judge Scheindlin has imposed a burden-shifting test, whereby the spoliating party would have the opportunity to rebut such a presumption and demonstrate that the innocent party has not been prejudiced by the absence of missing information.

Determining an appropriate sanction for spoliation is left to the discretion of the trial judge and, as clarified in Judge Scheindlin's Amended Order, the adequacy of a search for documents must be reviewed on a case-by-case basis.  Sanctions may include further discovery, cost-shifting, fines, special jury instructions, preclusion, or - for the most egregious of cases where a party has engaged in perjury or intentionally destroyed evidence by burning, shredding, or wiping out computer hard drives – the entry of default judgment or dismissal.  In Pension, because the plaintiffs did not institute written litigation holds until two years after the case was transferred to the district court and, in various ways, failed to sufficiently supervise employees' collection of documents, Judge Scheindlin instructed the jury that it could presume that the lost evidence was both relevant and favorable to the defendant.  This presumption would be subject to the plaintiffs' ability to rebut the presumption, but if unsuccessful, it would lead to an adverse inference in favor of the defendant.  Judge Scheindlin also ordered monetary sanctions against the plaintiffs, including an award of reasonable costs and attorneys' fees.  Furthermore, based on the admissions of two employees that backup tapes existed and had not been searched, Judge Scheindlin ordered that they search the tapes or demonstrate why they could not be searched.

To avoid the imposition of sanctions, this opinion urges litigants and potential litigants to:

• Preserve all relevant records – both paper and electronic;
• Preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the information is not obtainable from readily accessible sources;
• Institute timely written litigation holds;
• Preserve and collect documents from key players, current and former employees;
• Cease the deletion of e-mail;
• Maintain attorney oversight of employees' document collection where needed;
• Create a mechanism for the collection of the preserved records so that they can be searched by someone other than the employee; and
• Execute a comprehensive search for documents during discovery.

As guided by Judge Scheindlin in Pension, adhering to these steps and demonstrating an act of diligence and thoroughness in the preservation and collection of paper and electronic documents can successfully lead to a litigant's ability to avoid the detour of discovery sanctions.

[1] Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 U.S. Dist. LEXIS 1839 (S.D.N.Y. Jan. 11, 2010).