e-Discovery Docket Sheet

In a case involving alleged violations of the Securities and Exchange Act, the SEC requested documents from an accounting firm relating to its financial audit of the corporation being investigated. The corporation sought sanctions against the accounting firm, claiming the accounting firm committed fraud, misrepresentation and breach of contract in relation to the corporation's financial statements. The corporation argued that the accounting firm failed to produce all relevant documents and databases, along with versions of relevant documents and databases, and to promptly protect the documents from alteration. The company also claimed the accounting firm produced hard-copy documents in versions different from the electronic versions and failed to produce certain e-mails, metadata and other documents. In reviewing the matter, the magistrate judge, in a recently unsealed opinion, found that the absence of the e-mails suggested spoliation after the accounting firm was on notice to preserve those documents. The magistrate also declared the accounting firm had to have known that multiple database versions existed and the hard-copy production failed to capture relevant components ' such as metadata ' of the database. The magistrate recommended default judgment in favor of the corporation, declaring “[n]o reasonable person could believe that PwC's production … to Telxon … was a 'good faith' production.” The court further stated: “Because PwC's conduct has made it impossible to try this case with any confidence in the justice of the outcome, PwC should bear the burden created by its conduct.” In re Telxon Corp. Sec. Litig., No. 5:98CV2876 and No. 1:01CV1078 (N.D. Ohio July 2, 2004). (For more on this case, see, “Accounting Firm Faces Default Judgment Over e-Dababase Discovery Responses,” in the February 2005 edition of e-Discovery Law & Strategy.)

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Court Orders Defendant To Pay $2.5 Million
In Discovery Abuse Sanctions

In a case involving a breach-of-contract claim, the plaintiff appealed the trial court's decision granting costs, sanctions for discovery abuse and prejudgment interest in favor of the defendant. The trial court determined that the plaintiff's failure to produce a database in response to the defendant's discovery request “tainted, corrupted, or permeated all of the discovery in the case.” On appeal, the plaintiff argued that the trial court's finding was unsupported by the evidence and clearly erroneous because it had produced more than 61,000 pages of documentation and the defendant did not assert that those documents were fraudulent. Rejecting this contention, the appellate court observed that the plaintiff did not attempt to refute the trial court's finding by demonstrating that its conduct regarding the database did not “taint, corrupt, or permeate all the discovery.” The appellate court affirmed the trial court's order in part and awarded the defendant attorney fees, costs and expert-witness fees. The appellate court declined to award prejudgment interest, deciding that the state statute referring to prejudgment interest did not apply to monetary sanction awards. Nartron Corp. v. General Motors Corp., 2005 WL 26991 (Mich. Ct. App. Jan. 6, 2005).

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Defendants' Challenges To Exclude
e-Mail Search Warrants Fail

In an investigation relating to suspicions that the defendants supplied athletes with illegal performance-enhancing drugs, a magistrate judge issued search warrants permitting the government to search Yahoo! and AOL e-mail accounts allegedly used by the defendants and a drug company. The defendants challenged these warrants and a warrant permitting seizure of e-mail correspondence with athletes, claiming the warrants were stale, overbroad and lacked probable cause. Concluding that it was likely the e-mail accounts would contain e-mails relating to the distribution of the drugs, the court found that probable cause existed for issuing the warrants. The court also declared that the warrants were not stale, because the e-mail accounts were used recently. The court also found that the warrants were not overbroad, because they did not permit the seizure of all e-mails in the accounts. Rather, the warrants permitted seizure of only e-mails that were restricted to financial matters and performance-enhancing drugs. United States v. Conte, 2004 WL 2988567 (N.D.Cal. Dec. 28, 2004).

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Court Orders Document Production,
Sanctions Counsel For Discovery Misrepresentations

Claiming the defendants violated a limited-publication agreement, the plaintiffs subpoenaed relevant electronic documents. The defendants refused to comply with the subpoena, claiming undue burden and expense. The plaintiffs brought a motion to compel document production. In response, defense counsel advised the court that the automatic stay provision under bankruptcy law did not subject a debtor to civil discovery unless a bankruptcy court lifts the automatic stay. Based on this representation, the court gave the plaintiffs leave to withdraw their motion to show cause. Filing in bankruptcy court, the plaintiffs moved a second time to compel the document production. The plaintiffs also sought sanctions against defense counsel for her “unsupported verbal representations” regarding the automatic stay provision. Noting that the defendants' noncompliance argument was unsupported by case law and that the plaintiffs had attempted to minimize compliance costs, the bankruptcy court granted the plaintiff's motion to compel the electronic documents. The bankruptcy court also granted the motion for monetary sanctions against defense counsel, declaring “[t]here is a not so fine line … between zealous advocacy and intentional misrepresentation of the facts of this case.” Peter Rosenbaum Photography Corp. v. Otto Doosan Mail Order Ltd., 2004 WL 2973822 (N.D.Ill. Nov. 30, 2004).

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Court Refuses To Order Plaintiff To
Search Catalog of Documents

The defendant requested clarification of a discovery order and asked the court to order the plaintiff to sort through a “catalog of 'tens of millions' of documents” to separate the relevant from nonrelevant documents. The defendant's original request had called for “[a]ll documents produced by [the defendant] to IBM in any litigation.” The plaintiff contended that it had satisfied this request by offering to provide the defendant with a $40,000 set of portable computer disks containing all of the documents produced to IBM in litigation. Reviewing the matter, the court noted that the parties' inability to agree on discovery matters “highlight[ed] attempts by both sides to needlessly delay and complicate discovery.” Despite this, the court stated that it would not order the plaintiff to produce fewer documents than the defendant initially demanded. As such, the court denied the defendant's requests to narrow the catalog of data to documents relevant in this litigation. Compuware Corp. v. Moody's Investors Servs., Inc., 2004 WL 2931401 (E.D.Mich. Dec. 15, 2004).

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Attorney's Fees, Investigation Costs Denied
Where Employer Showed No Injuries From
Employee's Computer Conduct

An employer sued a former employee for accessing and misusing the employer's computer system with the intent of distributing the information to a competitor. The employee, who downloaded computer data and e-mails without authorization, never shared the stolen information with a competitor. The employer argued that it was entitled to reimbursement for attorney fees and the cost of investigating the employee's computer. The trial court refused to award costs, finding no actual injury occurred because the evidence showed that the employee had not looked at the documents after taking them and, in fact, that the employee ultimately destroyed the documents. On appeal, the appellate court confirmed the trial court's decision and declined to award costs, finding that the employer did not prove actual injuries. News Am. Mktg. In-Store, Inc. v. Marquis, 862 A.2d 837 (Conn. App. Ct. 2004).

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Michele C.S. Lange Charity Delich E-Discovery Case Law Update Computer Forensics www.krollontrack.com e-Discovery Law & Strategy [email protected]

Magistrate Recommends Default Judgment
For Spoliation Of Electronic Information

In a case involving alleged violations of the Securities and Exchange Act, the SEC requested documents from an accounting firm relating to its financial audit of the corporation being investigated. The corporation sought sanctions against the accounting firm, claiming the accounting firm committed fraud, misrepresentation and breach of contract in relation to the corporation's financial statements. The corporation argued that the accounting firm failed to produce all relevant documents and databases, along with versions of relevant documents and databases, and to promptly protect the documents from alteration. The company also claimed the accounting firm produced hard-copy documents in versions different from the electronic versions and failed to produce certain e-mails, metadata and other documents. In reviewing the matter, the magistrate judge, in a recently unsealed opinion, found that the absence of the e-mails suggested spoliation after the accounting firm was on notice to preserve those documents. The magistrate also declared the accounting firm had to have known that multiple database versions existed and the hard-copy production failed to capture relevant components ' such as metadata ' of the database. The magistrate recommended default judgment in favor of the corporation, declaring “[n]o reasonable person could believe that PwC's production … to Telxon … was a 'good faith' production.” The court further stated: “Because PwC's conduct has made it impossible to try this case with any confidence in the justice of the outcome, PwC should bear the burden created by its conduct.” In re Telxon Corp. Sec. Litig., No. 5:98CV2876 and No. 1:01CV1078 (N.D. Ohio July 2, 2004). (For more on this case, see, “Accounting Firm Faces Default Judgment Over e-Dababase Discovery Responses,” in the February 2005 edition of e-Discovery Law & Strategy.)

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Court Orders Defendant To Pay $2.5 Million
In Discovery Abuse Sanctions

In a case involving a breach-of-contract claim, the plaintiff appealed the trial court's decision granting costs, sanctions for discovery abuse and prejudgment interest in favor of the defendant. The trial court determined that the plaintiff's failure to produce a database in response to the defendant's discovery request “tainted, corrupted, or permeated all of the discovery in the case.” On appeal, the plaintiff argued that the trial court's finding was unsupported by the evidence and clearly erroneous because it had produced more than 61,000 pages of documentation and the defendant did not assert that those documents were fraudulent. Rejecting this contention, the appellate court observed that the plaintiff did not attempt to refute the trial court's finding by demonstrating that its conduct regarding the database did not “taint, corrupt, or permeate all the discovery.” The appellate court affirmed the trial court's order in part and awarded the defendant attorney fees, costs and expert-witness fees. The appellate court declined to award prejudgment interest, deciding that the state statute referring to prejudgment interest did not apply to monetary sanction awards. Nartron Corp. v. General Motors Corp., 2005 WL 26991 (Mich. Ct. App. Jan. 6, 2005).

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Defendants' Challenges To Exclude
e-Mail Search Warrants Fail

In an investigation relating to suspicions that the defendants supplied athletes with illegal performance-enhancing drugs, a magistrate judge issued search warrants permitting the government to search Yahoo! and AOL e-mail accounts allegedly used by the defendants and a drug company. The defendants challenged these warrants and a warrant permitting seizure of e-mail correspondence with athletes, claiming the warrants were stale, overbroad and lacked probable cause. Concluding that it was likely the e-mail accounts would contain e-mails relating to the distribution of the drugs, the court found that probable cause existed for issuing the warrants. The court also declared that the warrants were not stale, because the e-mail accounts were used recently. The court also found that the warrants were not overbroad, because they did not permit the seizure of all e-mails in the accounts. Rather, the warrants permitted seizure of only e-mails that were restricted to financial matters and performance-enhancing drugs. United States v. Conte, 2004 WL 2988567 (N.D.Cal. Dec. 28, 2004).

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Court Orders Document Production,
Sanctions Counsel For Discovery Misrepresentations

Claiming the defendants violated a limited-publication agreement, the plaintiffs subpoenaed relevant electronic documents. The defendants refused to comply with the subpoena, claiming undue burden and expense. The plaintiffs brought a motion to compel document production. In response, defense counsel advised the court that the automatic stay provision under bankruptcy law did not subject a debtor to civil discovery unless a bankruptcy court lifts the automatic stay. Based on this representation, the court gave the plaintiffs leave to withdraw their motion to show cause. Filing in bankruptcy court, the plaintiffs moved a second time to compel the document production. The plaintiffs also sought sanctions against defense counsel for her “unsupported verbal representations” regarding the automatic stay provision. Noting that the defendants' noncompliance argument was unsupported by case law and that the plaintiffs had attempted to minimize compliance costs, the bankruptcy court granted the plaintiff's motion to compel the electronic documents. The bankruptcy court also granted the motion for monetary sanctions against defense counsel, declaring “[t]here is a not so fine line … between zealous advocacy and intentional misrepresentation of the facts of this case.” Peter Rosenbaum Photography Corp. v. Otto Doosan Mail Order Ltd., 2004 WL 2973822 (N.D.Ill. Nov. 30, 2004).

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Court Refuses To Order Plaintiff To
Search Catalog of Documents

The defendant requested clarification of a discovery order and asked the court to order the plaintiff to sort through a “catalog of 'tens of millions' of documents” to separate the relevant from nonrelevant documents. The defendant's original request had called for “[a]ll documents produced by [the defendant] to IBM in any litigation.” The plaintiff contended that it had satisfied this request by offering to provide the defendant with a $40,000 set of portable computer disks containing all of the documents produced to IBM in litigation. Reviewing the matter, the court noted that the parties' inability to agree on discovery matters “highlight[ed] attempts by both sides to needlessly delay and complicate discovery.” Despite this, the court stated that it would not order the plaintiff to produce fewer documents than the defendant initially demanded. As such, the court denied the defendant's requests to narrow the catalog of data to documents relevant in this litigation. Compuware Corp. v. Moody's Investors Servs., Inc., 2004 WL 2931401 (E.D.Mich. Dec. 15, 2004).

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Attorney's Fees, Investigation Costs Denied
Where Employer Showed No Injuries From
Employee's Computer Conduct

An employer sued a former employee for accessing and misusing the employer's computer system with the intent of distributing the information to a competitor. The employee, who downloaded computer data and e-mails without authorization, never shared the stolen information with a competitor. The employer argued that it was entitled to reimbursement for attorney fees and the cost of investigating the employee's computer. The trial court refused to award costs, finding no actual injury occurred because the evidence showed that the employee had not looked at the documents after taking them and, in fact, that the employee ultimately destroyed the documents. On appeal, the appellate court confirmed the trial court's decision and declined to award costs, finding that the employer did not prove actual injuries. News Am. Mktg. In-Store, Inc. v. Marquis , 862 A.2d 837 (Conn. App. Ct. 2004).

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Michele C.S. Lange Charity Delich E-Discovery Case Law Update Computer Forensics www.krollontrack.com e-Discovery Law & Strategy [email protected]