Best Buy Wins Key e-Discovery Ruling in Fraud Case

bestbuy2.jpgOh what a tangled web we weave, When first we practise to deceive!
Sir Walter Scott – 1808

In a pair of fraud cases, Best Buy turned aside allegations that its e-discovery efforts were “haphazardous,” and used Rule 26(b)(2)(B) to overturn a harsh ruling. Best Buy Stores, L.P. v. Developers Diversified Realty Corp., 2007 WL 4230806 (D. Minn., Nov. 29, 2007). The magistrate’s order in the Developers Diversified Realty (“DDR“) case, where Best Buy is suing its landlords for fraud, required Best Buy to produce a vast database of electronic documents. Best Buy had prepared this database in another case where it was defending against claims of consumer fraud. The parties agreed that the cost to comply with the order would be $200,000, which was 25% of the total value of the case. The district court judge reversed the discovery order as clearly erroneous. The judge recognized that the order placed an undue burden upon Best Buy that was out of proportion to the size of the case or the importance of the documents sought.

In DDR, Best Buy alleges that seventeen of its landlords tried to defraud it by inflating the yearly insurance fees included in common area maintenance charges. In addition, Best Buy claims breach of contract and breach of fiduciary duty. It has amended the DDR complaint six times to try to make all of these claims stick. Even though the original complaint was filed on September 5, 2005, the Defendants have still not answered the complaint.

In addition to having the complaint dismissed multiple times, the landlord defendants were able to obtain a potentially “case settling” e-discovery order from Magistrate Judge Jeanne Graham on September 5, 2007. The order required Best Buy to search and produce information on leases and insurance from a database Best Buy had prepared for use in a totally unrelated consumer fraud case pending in Seattle, Washington. Odom v. Microsoft Corp. and Best Buy Co., D.C. No. CV-03-02976-MJP.

The database in question is huge! It consists of ESI from the shared drive for all documents in a department (the “V: drive”), and from the personal drives of all employees on the main system (“P: drive”). Best Buy Stores, L.P. v. Developers Diversified Realty Corp., at *5 FN. 2.  The database appears to have essentially all of Best Buy’s electronic documents that were stored outside its email systems. Best Buy supposedly spent $27,823 a month just for a vendor to store this database.

The parties in DDR all agreed that the database contained non-privileged ESI relevant to the landlord/tenant dispute, but this was not why the database was prepared. Best Buy prepared it to try to defend itself in Odom where it was accused of  defrauding consumers in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).  After two years, this putative class action complaint was dismissed with prejudice on March 16, 2004. Odom v. Microsoft Corp., 2004 WL 5407314 (W.D. Wash. 2004). The Seattle court did not think that Microsoft and Best Buy were Mafia-style racketeers within the meaning of the RICO Act.

Best Buy had thought that was the end of Odom, and so the database it created for the case was “downgraded” on July 27, 2006. DDR at *3. There is no clear explanation in the DDR opinion as to exactly what “downgraded” means, nor why Best Buy waited over two years to do it. This is puzzling, as Best Buy claims it costs $27,823 per month to store the database.

As to the definition of “downgraded,” it is only clear that the landlord defendants and Magistrate thought that the database was archived by an e-discovery vendor before it was destroyed. Best Buy disputes this, and contends the database was simply destroyed, but it could be recreated from backup tapes of the original sources, the “V” and “P” drives.

Ten months after Best Buy allegedly destroyed the database, the Ninth Circuit surprised Best Buy by reversing the dismissal and reinstating the complaint. Odom v. Microsoft Corp. and Best Buy Co., 486 F.3d 541 (9th Cir., May 4, 2007). The appeals court in an en banc decision held that Odom’s complaint adequately pled “associated in fact” and “enterprise” under RICO, and also that it pled wire fraud with sufficient particularity. The case was remanded back to the district court for trial. One would think this would cause Best Buy to restore the Odom database so that it could defend the allegations of consumer fraud. Apparently not, since Best Buy vigorously opposed the restoration of the database in DRR, and this point is nowhere mentioned in the DDR opinion.

After the Ninth Circuit reversal, the news for Best Buy went from bad to worse. Shortly after the case was reinstated, one of the key lawyers representing Best Buy in the state court version of the Odom class action suffered a nervous breakdown and admitted that he had fabricated evidence. According to an article by Matthew Hirsch, the Minnesota law firm, Burke & Thomas, moved to withdraw on May 24, 2007, upon its discovery that one of its partners, Timothy Block, “had redacted and altered documents that he later produced to plaintiffs in this matter.” Mr. Block voluntarily reported his fraudulant actions to the state Bar, and took a medical leave of absence.

Plaintiffs’ counsel questions the veracity of this story. They seem inclined to blame Best Buy for the fraud, not their lawyers. They point out that they have had a motion for default sanctions pending against Best Buy for bad faith obstruction of discovery in the state court action since February 2007. To make matters worse, on October 15, 2007, the U.S. Supreme Court let the Ninth Circuit decision stand by refusing certiorari. Microsoft Corp. v. Odom, 128 S.Ct. 464, 76 USLW 3058, 76 USLW 3197, 76 USLW 3199 (U.S. Oct 15, 2007) (NO. 07-138).

Against this backdrop, on September 5, 2007, the Magistrate in DDR found that the Odom database was reasonably accessible, and ordered Best Buy to restore it from its “downgraded” condition, search it, and produce the relevant data. Magistrate Graham rejected Best Buy’s argument that the Odom database was protected from discovery under Rule 26(b)(2)(B). She did not consider the alleged cost of $124,000 to restore the database, and $27,823 per month thereafter to store it, to be a large enough cost to render the ESI stored on the Odom database “not reasonably accessible” under Rule 26(b)(2)(B). Yet the total amount at issue was $800,000. Assuming it would take at least three months to search this massive database, this one discovery request by the defendants would cost the plaintiff over $200,000. That is 25% of the total amount at issue. This is a textbook example of an undue burden and expense under Rule 26(b)(2)(C).

The District Court Judge found the Magistrate’s ruling to be “clearly erroneous” and reversed the decision. Judge Doty held that the high cost to restore and house the Odom database rendered it “not reasonably accessible” under Rule 26(b)(2)(B) and (C). Although exactly what was involved in the downgrading of the Odom database was disputed, apparently the landlord defendants did not contest the costs of restoration and storage. Instead, they focused their allegations and argument on the alleged incompetence of the Best Buy internal e-discovery team, seeking to blame them for the poorly timed downgrading and resultant high costs to restore, search and produce. In the words of Judge Doty:

The focus of defendants’ arguments, both in response to Best Buy’s objection and in their own generalized objections, is that Best Buy haphazardly conducted electronic discovery. Specifically, defendants note concern about the lack of involvement from Best Buy’s information technology department to aid in the collection of ESI, the search practices of Best Buy’s property management department, Best Buy’s failure to preserve and search documents related to departed employees and Best Buy’s alleged failure to adequately search e-mail archives. Defendants, however, have failed to connect any of these concerns with the specific discovery ordered by the magistrate judge.

This “blame it on the Geek Squad” strategy proved to be a mistake. Judge Doty did not focus on the cause of the relative inaccessibility of the Odom database. He focused instead on the high cost and the failure of defendants to demonstrate a substantial benefit from such expensive discovery. The court was persuaded by Best Buy that the relevant information on leases and insurance contained in the Odom database was likely also to be found among the paper records, thus there was no need for restoration. In the words of the Court:

Defendants argue that the Odom database will contain materials responsive to the discovery ordered by the magistrate judge because Best Buy has yet to search for such materials. However, defendants do not argue that these materials are uniquely available from the Odom database or that Best Buy could not more easily obtain the materials from another source. Indeed, the ordered discovery likely exists in hard copy format, and any relevant ESI could be gathered manually without the need for restoration of the Odom database. 

The Court engaged in a formal 26(b)(2)(B) analysis of the discovery dispute, following the wording of the Rule. As mentioned, to begin the analysis, the district court judge reversed the magistrate’s holding that the Odom database was reasonably accessible. The primary basis for the “clearly erroneous” reversal was the cost, and that the database “would have to be restored from original sources.” DDR at *3.  The meaning of the “restoration from original sources” point was not explained.

The landlord defendants argued that this analysis was flawed because the Odom database was easily searchable before it was “downgraded” on July 27, 2006. Defendants claim that since Best Buy filed the DDR suit in 2005, it was clearly under a duty to preserve the database a year later. Defendants argued that even though the database was created for another case, Best Buy should have known that it contained ESI relevant to this case. Thus, Best Buy had a duty to preserve it. The defendants argued that Best Buy violated its duty when it downgraded the Odom database, and should not be rewarded for this spoliation.

The District Court agreed with defendants that Best Buy should have known that the defendants in DDR would seek information in the database because it contained relevant information. But as Judge Doty pointed out, the Odom database was so extensive that it would have information relevant to any lawsuit involving Best Buy. Since there were no specific discovery requests pending against the Odom database until March 21, 2007, Best Buy did not have an obligation to keep paying over $27,000 per month to store it. As the Court explains:

Because of the vast quantity of information in the Odom database, Best Buy should have been on notice that defendants would seek discovery of some of that information. The database, however, would have been potentially relevant to virtually any litigation involving Best Buy because of the quantity and nature of the information it contained. Absent specific discovery requests or additional facts suggesting that the database was of particular relevance to this litigation, FN3 the court determines that Best Buy did not have an obligation to maintain the Odom database at a monthly cost of over $27,000. Moreover, by downgrading the database, Best Buy did not destroy the information it contained but rather removed it from a searchable format. Therefore, Best Buy did not have a duty to preserve the Odom database as of July 27, 2006, and it need not restore the information to searchable format unless defendants establish good cause.

The Court then considered the good cause exception of Rule 26(b)(2)(B) wherein a court may still compel production of not-reasonably-accessible ESI if “the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C).” Rule 26(b)(2)(B).  Rule 26(b)(2)(C) limits otherwise permissible discovery if the court determines that:

(i) the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive; (ii) the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or (iii) the burden or expense of the proposed discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues.

Since the Court was persuaded that the leasing and insurance information was probably obtainable from sources other than the Odom database, and since the costs to restore the database were so high, the Court concluded that the landlord defendants had not established good cause. For these reasons, the Court sustained Best Buy’s objections to the magistrate’s order and held that it did not have to restore the Odom database.

Pragmatically, this ruling rescued Best Buy. The Magistrate’s earlier ruling would have forced Best Buy into a cheap settlement of its case against its landlords. It was unlikely Best Buy would have been willing to pay 25% of the total amount at issue for an unrecoverable cost just to respond to one of many discovery requests.

One Response to Best Buy Wins Key e-Discovery Ruling in Fraud Case

  1. […] Losey, Best Buy Wins Key e-Discovery Ruling in Fraud Case. Here’s Mr. Losey’s summary of the much-discussed Best Buy Stores L.P. v. Developers […]

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