Declaratory Judgment Approach to Burdensome Pre-Litigation Preservation Demand Tried and Rejected: Is this a Case of “No Good Deed Goes Unpunished”?

Guest Blog: by Michael Simon

In the final paragraph of last week’s post Ralph made the following suggestion on a potential way to deal with an onerous pre-litigation hold demand:

If all else fails, and the potential dollar exposure justifies the expense, a preemptive suit for a declaratory judgment may even be appropriate. You will be breaking new ground to be sure, but as the landscape of litigation changes, new strategies such as this should be considered to cope with the new challenges these changes present.

Unbeknownst to Ralph, at the very time he was writing those prophetic words, the United States District Court for the Eastern District of Texas was giving a thumbs down to that very idea. The case is Texas v. City of Frisco, 2008 WL 828055 (E.D. Tex. Mar. 27, 2008). In reality, as I will explain below, this may be a case where two rights make a wrong: The plaintiff did such a good job of complying with the litigation hold that the Court could not understand plaintiff’s problem.

In Frisco, the State of Texas was faced with the following dilemma: The Texas Department of Transportation (“TxDot“) was planning to convert portions of State Highway 121 from a freeway to a toll road. Apparently a portion to be converted went through the City of Frisco. The City seemingly did not want the pleasure of paying tolls and was (and perhaps still is) considering filing a challenge to the Environmental Re-Evaluation of the State Highway pursuant to the National Environmental Policy Act (“NEPA”), 42 U.S.C. §§4331-4347. As a kick-off to this potential litigation, on April 13, 2007 the City sent TxDot a letter entitled Notice Regarding Preservation of Electronic Data.

This preservation demand does (perhaps intentionally) a poor job of specifying the subject matter of the demand. It broadly states that TxDot should preserve “electronic data associated with SH 121 and its conversion from a freeway to either a privatized or public tollway.” As to the types of ESI to be preserved, the demand is fairly well drafted and imposes a heavy burden on TxDot:

• The demand explicitly instructs TxDot to “immediately preserve potentially relevant Electronic Data including, without limitation information with the earlier of a Created or Last Modified date on or after January 1, 2004 through the date of this demand.
• The demand identifies a relatively comprehensive and quite burdensome list of potential ESI file types to be preserved, including items such as “deleted files,” “computer system activity logs,” “all file fragments and back-up files containing Electronic Data,” and “all backup tapes or other storage media.”
• The demand instructs TxDot to “preserve and retain all Electronic Data” which “relates to, mentions and/or is received or generated by TxDot… in connection with the plan and/or project to convert SH 121 into a tollway or any subsequent related work/project.” The demand specifically states that this includes all communications with: the contractor and other bidders for the project; the City of Frisco; any of numerous Texas government departments and the Legislature and the Governor.
• The demand even reminds TxDot that “you must intervene to prevent the loss of information as a result of routine operations, protocols and/or destruction policies.”

Perhaps with tongue slightly planted in cheek, the demand offers that “It is not our intent to obstruct TxDot’s everyday operation,” but then goes on to remind TxDot that “your diligent and good faith compliance of this request should also include modification or suspension of features of your information system, which in routine operation may cause the loss of relevant information….”

As with any litigation hold demand, TxDot had to make a decision: did it need to comply with the demand? If so, what is the scope of the preservation duty?

Is There an Obligation to Preserve Pre-Litigation?

The Federal Rules do not actually require the implementation of a pre-litigation hold. See Committee Note, Rule 37(f). As explained by footnote 13 in The Sedona Conference Commentary on Legal Holds (the “Commentary”):

The Advisory Committee on Civil Rules debated whether it could specify preservation obligations in the Federal Rules of Civil Procedure but ultimately decided it could not do so. Rather, the Committee opted to temper the impact of preservation obligations by protecting parties from the imposition of sanctions under the Rules for the failure to preserve certain materials in limited circumstances.

But under the circumstances here, with the City putting TxDot on notice that it was contemplating what would obviously be massive litigation and making an express demand for preservation, there really is little question that TxDot would have been taking a massive risk to ignore the City’s demand. As the Commentary puts it, The duty to preserve relevant information arises when litigation is “reasonably anticipated.” And the City’s preservation demand meets most every one of the factors listed under the Commentary’s Guideline 4, entitled, The determination of whether litigation is reasonably anticipated should be based on a good faith and reasonable evaluation of relevant facts and circumstances. These factors include:

• The nature and specificity of the complaint or threat;
• The position of the party making the claim;
• Whether the threat is direct, implied or inferred;
• The strength, scope, or value of a potential claim; and
• Press and or industry coverage of the issue either directly pertaining to the client, or of complaints brought against someone similarly situated in the industry.

Given that it would have been difficult to impossible for TxDot to treat the City’s letter as anything but putting it on notice that litigation was “reasonably anticipated,” TxDot really had no choice but to implement a litigation hold. Not so clear is what the scope of that hold should have been, and this is where TxDot, in trying to do everything right, may have shot itself in the foot.

TxDot’s Dilemma: How to Resolve an Overbroad Pre-Litigation Hold Demand

The City’s demand for all ESI “associated with SH 121” and “its conversion from a freeway,” including to and from every possible party and from many sources (such as backup tapes) that were likely inaccessible, was unquestionably burdensome for an agency as massive as TxDot. Further, according to the complaint TxDot ultimately filed, most of that information was irrelevant since (according to TxDot) the City’s claim must be brought under the Federal Administrative Procedure Act (“APA”). According to TxDot, Under NEPA and the APA plaintiffs are generally not entitled to discovery because “courts limit their review to the agency record specifically compiled for the Environmental Re-evaluation.”

Clearly this left TxDot in a quandary: if the City had initiated litigation, then TxDot could have tried to resolve these issues at the mandatory Rule 26(f) conference and, if necessary, brought a motion for protective order under Rules 26 and 34. But because this was pre-litigation TxDot did not have a clearly defined path. The path that TxDot chose is certainly hard to criticize but, as discussed below, that choice may have ultimately contributed to its failure in court.

Even though the City Refused to Clarify or Limit its Demands, TxDot Took Extraordinary Steps to Comply before It Ever Filed It’s Plea with the Court

TxDot’s initial approach was twofold: (1) TxDot made repeated pleas to the City to clarify and narrow the subject matter of the City’s demands; and (2) TxDot immediately initiated a very thorough and aggressive effort to preserve everything. Whether out of spite or an inability to clearly articulate what it really wanted, the City refused to provide any clarification and did not even respond to several of TxDot’s letters. TxDot’s exhibits to its ultimate court filing show a huge (and certainly costly) effort to preserve all ESI. For example, within three days of receipt of the City’s demand, TxDot sent an e-mail preservation notice to approximately 200 “key players”. That notice warned the key players in part that:

TxDot has an affirmative obligation to comply with the request for preservation…. This obligation requires initiation of a litigation hold to ensure relevant documents are preserved… A ‘litigation hold’ requires intervention in the routine operation…to prevent loss of information…. Please preserve any electronic edata described in the attached letter, including all backup tapes or other storage media, whether online or offline, and refrain from overwriting or deleting information that may contain the electronic data…. This includes turning off any auto delete function on Groupwise.

Shortly after, TxDot informed the key players that the preservation should include:

[I]nformation stored not only on servers, desktop computers, and laptops, but also on a personal digital assistant (PDA – i.e. iPAQ, Blackberry, Treo), flash drive or other media storage devices. Information that is stored in more than one, or even all, of these transient media must be preserved in a secure and recoverable electronic environment. If you perform official state business related to SH 121 on a home computer or any other device, that information is also subject to the litigation hold.

A short time later, TxDot published a more formal protocol for the litigation hold and sent its key players and each of its many offices detailed instructions for the preservation of e-mails and other ESI in a segregated protected network storage area as well as procedures for the restoration of documents from backup tapes. These instructions made clear that the process was being standardized and implemented in every office in the State.

Too Little Too Late: TxDot Gets Fed Up andFinally Seeks the Court’s Assistance

After about three months of this circus, TxDot apparently came to appreciate just how massive and expensive this unfettered preservation task was going to be (according to its papers, it had already spent hundreds of hours in compliance). Finally, TxDot hit on the strategy that Ralph posited last week: On August 14, 2007, TxDot filed its Plaintiff’s Original Complaint and Request for Declaratory Relief and Protective Order in the Sherman Division of the United States District Court for the Eastern District of Texas. TxDot explained the requested relief this way:

TxDot requests the court to enter a declaratory judgment ruling that the City’s letter violates the Federal Rules of Civil Procedure and is contrary to rules governing a NEPA/APA claim in federal court. TxDot requests this court’s protection from … the broad scope and undue burden of the litigation hold and requests a declaratory judgment releasing TxDot from the litigation hold as it violates the Federal Rules….

Even though the exhibits TxDot attached certainly show the burden to someone experienced in e-Discovery for all of the reasons discussed above, TxDot’s complaint did a poor job of quantifying or otherwise explaining this burden to the court. Perhaps this is part of what led the court to take a pass on this one.

The Court Dismisses TxDot’s Complaint as “Unripe”

Magistrate Don D. Bush did not treat the City’s plea kindly. Citing to Shields v. Norton, 289 F.3d 832, 835 (5^th Cir. 2002) Judge Bush noted:

A suit for declaratory relief, while allowing a party to anticipate a suit and seek a judicial resolution, must nevertheless meet this keystone limitation. In hornbook form, a declaratory action must be ripe in order to be justiciable, and is ripe only where an actual controversy exists. An actual controversy exists where a substantial controversy of sufficient immediacy and reality exists between parties having adverse legal interests. Ordinarily whether particular facts are sufficiently immediate to establish an actual controversy yields answers on a case-by-case basis. Whether a declaratory action is ripe, by its very structure, pushes against our insistence upon mature disputes. That is, it contemplates an ex ante determination of rights that exists in some tension with traditional notions of ripeness.

Judge Bush immediately hit upon the fact that it was not TxDot’s rights in the underlying environmental dispute that were at issue, but the much more amorphous concept of the scope of potential future discovery:

Notably, it is not the City’s potential claims regarding the tollway project that forms the basis of the State’s declaratory judgment action. Rather, the State seeks a declaratory judgment as to how rules of discovery and procedure might be applied by the Court to its preservation of documents in that potential suit…. As a result of the City’s litigation hold letter, the State asks this Court to determine “[w]hether it is a violation of Rules 26(f) and 34 to require an entity to broadly preserve and retain any and all electronic documents based on a required [sic] made before suit is filed.

Citing to Orix Credit Alliance, Inc., 212 F.3d at 896, 897, Judge Bush did note that a threat of litigation can indeed establish a controversy upon which declaratory judgment can be based, but he did not find that TxDot had presented such a threat since he found that the City’s letter “only states that potential exists for litigation” and not an actual threat. However, perhaps TxDot’s true failure is explained by the court’s very next paragraph:

Moreover, even if the Court were to insert itself into the pre-litigation discovery process (which it declines to do), the correspondence attached to Plaintiff’s Complaint does not evidence any concrete or developed disagreement by the parties as to the preservation of documents. A pre-enforcement action like Plaintiff’s is only ripe “if any remaining questions are purely legal … [and] further factual development” is not required for effective judicial review. The facts here are not fully developed. The dispute is abstract, “hypothetical and not suited for judicial determination.” (citations omitted)

This may be the indication of two rights making a wrong: What is Judge Bush is really saying here is that, after reviewing the exhibits, he sees: (1) a demand made by the City; (2) TxDot asking for clarification (right #1); but (2) TxDot fully complying anyway! (right #2). Since he sees a demand and the clear appearance of the ability to comply, what is the controversy? As mentioned above, TxDot does not quantify in any way the cost of its compliance efforts. All the court sees is demand and compliance, hardly the subject of a ripe dispute.

What Else Could TxDot have Done? Limited Itself to “Good Faith” Compliance.

Does this mean that Ralph’s original thesis of using a declaratory relief action to avoid an overburdensome pre-litigation demand is doomed to failure? Perhaps not. In fact, the bromide that Judge Bush offers at the very end of his decision may shed some light on the better initial course TxDot should have taken to set up the issue:

Further, while they do not specifically address pre-suit litigation hold requests, the Rules of Civil Procedure contemplate that the parties will act in good faith in the preservation and production of documents. Fed. R. Civ. P. 37. The Court encourages both parties to handle the preservation of documents in response to their respective litigation holds in such good faith. The Court declines, however, to intervene now and issue an advisory opinion as to what actions by the State would constitute good faith as to the City’s request. (emphasis added)

The court is reminding the parties that their real obligation is to act in good faith. Perhaps TxDot forgot that good faith compliance and total unquestioning compliance are not necessarily the same thing.

Part Two of the Commentary, entitled IMPLEMENTING THE LEGAL HOLD explains that:

When implementing a legal hold, it is important to recognize that the duty to preserve extends only to relevant information. While relevance is broadly defined under the Federal Rules of Civil Procedure (see Fed. R. Civ. P. 26(b)(1)), it is not without limits. As noted by one court, there is no broad requirement to preserve information that is not relevant: “Must a corporation, upon recognizing the threat of litigation, preserve every shred of paper, every e-mail or electronic document, and every backup tape? The answer is clearly, ‘no.’ Such a rule would cripple large corporations. (citing to Zubulake IV, 220 F.R.D. at 217.)

In other words, there must be some analysis of the proportionality of the potential burden with the relevance of the information sought to be preserved. Not everything necessarily need be preserved, especially if, in TxDot’s evaluation, the data was not even relevant to the anticipated dispute because either: (1) it was not part of the administrative record; or (2) it pertained to other portions of SH 121 not in dispute. While TxDot did try to engage the City in a conversation on the limits of relevance, when the City refused, TxDot simply gave in and tried to preserve everything.

Perhaps TxDot would have been better served by taking a slightly more aggressive stance. Rather than assuming there was nothing it could do without court intervention, TxDot could have responded to the City’s demand by informing them that it was so overbroad and overburdensome that TxDot would not attempt to comply but would gladly meet with the City in an effort to narrow the scope to something with which TxDot could comply. With that type of explicit notice, the City would then be placed in a quandary: either it could negotiate with TxDot (as it would have to do in litigation under Rule 26 anyway) or risk that a court would ultimately be unsympathetic with any complaint about missing documents because, after all, the City was placed on notice.

Unfortunately for TxDot,it may now have precluded itself from this lower cost option because, through its now rejected complaint, TxDot has established that in fact it can comply with the City’s request, making it less likely that a court will agree that the effort was too burdensome to impose. Thus, TxDot’s attempt to do things “right” has created the “wrong” that TxDot is stuck with a very burdensome task.

Yet another example of my favorite quote from US Congresswoman, Ambassador and playwright, Claire Booth Luce: No good deed goes unpunished.

Michael Simon