Oral Hold Notice Invalidated as “Completely Inadequate” such that it “Borders on Recklessness”

The Chief Judge for the United States District Court in Idaho, Judge B. Lynn Winmill, has weighed in on the oral versus written preservation hold notice controversy. Scentsy Inc. v. B.R. Chase LLC, No. 1:11-cv-00249-BLW, 2012 WL 4523112 at *8 (D. Idaho Oct. 2, 2012) (Generally not deleting documents, and orally requesting certain employees to preserve relevant documents concurrently with filing a lawsuit, is completely inadequate. It is very risky—to such an extent that it borders on recklessness.)

Verbal Hold Notice Controversy

This controversy, like so many others in e-discovery law, was started by Judge Scheindlin. In her landmark Pension Committee opinion she held that it was gross negligence not to do several things to implement a litigation hold, one of which was to send out a hold notice in writing, and not rely on verbal notice alone. Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 685 F.Supp.2d 456, 465 (S.D.N.Y. 2010). At the time I seemed to be alone among commentators in thinking this whole this writing or not bright line test controversy was ridiculous, a tempest in a teapot. See Pension Committee Retrospective (2011); Raising the Bar – Judge Scheindlin Defines Gross Negligence in Spoliation (Jan. 2010). On this one point at least, Judge Scheindlin was clearly right. Let us accept this as a bright line, and move on. After all, everyone seems to agree that the whole area of preservation law needs more certainty. Let’s argue about consequences instead, whether crossing the line is gross or simple negligence, and the consequences of this omission.

Lawyers should do everything in their power to be sure litigants send out written hold notices. This is not a pro-plaintiff issue, as the Scentsy case demonstrates because the negligent notifier was the plaintiff. It is a pro-evidence issue. I am in favor of requiring reasonable efforts (not perfect efforts) to preserve evidence, and it is certainly reasonable to require that a notice be in writing. It is what I would call a standard practice for any size suit; the bare minimum to avoid negligence. The content and other details of written notice, and the other actions you take to preserve, beyond just generally not deleting documents, crosses over into the higher realms of better and best practices.

A written notice has long been a part of any e-discovery attorney’s minimum acceptable standards when it comes to preservation. It is so easy to do. Tell people to preserve in person or by phone; that is fine. But also send out an email to confirm the notice. I do acknowledge one exception, and I feel sure Judge Scheindlin and Judge Winmill would both agree, namely a situation with a one-person company. Sending a written hold notice to  yourself does seem more silly than reasonable. But even then, a memorandum of all preservation activities taken by the one man company to preserve would be in order.

But when you have a situation with multiple employees that might have evidence, even in a small company, I have never heard any expert recommend reliance on oral hold notices alone. It is usually a losing argument to attack this point in Pension Committee, as Scentsy shows. Argue about the other litigation hold requirements set forth in Pension Committee if you will, argue about remedies, or the blind per se classifications, or causation, but not about requiring the hold notice be in writing. See Eg: Surowiec v. Capital Title Agency, 790 F.Supp.2d 997, 1007 (D. Ariz. 2011) (rejecting Pension Committee’s holding that failure to issue a litigation hold constitutes “gross negligence per se” because “[p]er se rules are too inflexible for this factually complex are of the law“); Deyo, Deconstructing Pension Committee: the evolving rules of evidence spoliation and sanctions in the electronic discovery era, 75 Alb. L. Rev. 305 (2011/2012); Port Authority Police Asian Jade Soc. of N.Y. & N.J. v. Port Auth. of N.Y. & N.J., 601 F. Supp. 2d 566, 569 (S.D.N.Y. 2009) affirmed Chin v. The Port Authority, 685 F.3d 135 (2d Cir. 2012) (“We reject the notion that a failure to institute a “litigation hold” constitutes gross negligence per se. Rather, we agree that “the better approach is to consider [the failure to adopt good preservation practices] as one factor” in the determination of whether discovery sanctions should issue); Maese, Barnett, Stelcen, Second Circuit Rejects Bright-Line Test for Failure to Issue Hold Notice (NY Law Journal, 2012).

Since a few experts, including judges, disagree with me on this, and would prefer to avoid all bright lines when it comes to preservation notices, it was gratifying to see that Judge Winmill agrees with me in Scentsy. But see: Orbit One Communications, Inc. v. Numerex Corp., 2010 WL 4615547 (S.D.N.Y., Oct. 26, 2010) (J. Francis); Merck Eprova AG v. Gnosis S.P.A., 2010 WL 1631519, at *4 (S.D.N.Y. Apr. 20, 2010) (J. Sullivan); also see: Losey, Magistrate Judge in NY Says Verbal Hold Notice May Be Ok and Questions the Value of Proportionality (2010) (commentary on Orbit One).

There is Far More to Preservation than the Bare Minimum of Notice

Scentsy not only examines the oral hold notice issue, but also the issue of when a duty to preserve is triggered. Certainly the duty for a plaintiff will always be triggered before suit is filed, so there will always be a pre-litigation duty to preserve. The duty of a defendant may also sometimes be triggered before suit, but that depends on a number of factors.

The issues of hold timing, notice contents, notice recipients, and other actions that should be taken in a particular case to preserve evidence, are issues present in every case. These are legal activities requiring skilled legal judgment. That is why our new Electronic Discovery Best Practices site – EDBP.com – devotes three out of the ten attorneys practices to preservation related activities. They are the blue squares in the EDBP work flow chart.

Making Good Sense Without Scheindlin

Scentsy is a copyright and trade dress infringement case in the high stakes industry of scented candles. The name of the lead primary defendant is Harmony. You would think maybe they could settle their disputes over a good cup of tea and a few Omms, but no. The companies sued each other instead, and then got into a number of expensive discovery disputes. Scentsy Inc. v. B.R. Chase LLC, No. 1:11-cv-00249-BLW, 2012 WL 4523112 (D. Idaho Oct. 2, 2012).

The first part of the opinion addresses some of the non-e-discovery disputes that had been resolved by the Magistrate, and appealed, including an interesting argument over attorneys-eyes-only confidentiality. The last third of the opinion concerns the e-discovery preservation dispute, which arises out of the Defendants’ Motion to Compel Forensic Examination and/or Other Appropriate Relief. Id. at *6. That is where the preservation and verbal hold notice issues are discussed.

First, it is very interesting to note that although Scentsy reads like Schiendlin in Pension Committee, neither her name, nor any of her cases, included Pension Committee, are ever mentioned. How could this dispute be briefed without either side mentioning Pension Committee?

Anyway, to my mind this makes Judge Winmill’s holding all the more important. Even if you hide Pension Committee from your local judge, and after all it was not binding authority, just another district court opinion from outside of your Circuit, and so would not have to be cited, your judge is likely to reach the same opinion. It is just good common sense.

Judge Winmill Tells the Scentillating Story

As in so many cases, the devil is in the details, and they are set forth clearly and concisely in Scentsy. Judge Lynn Winmill is a good writer, a clear writer, and sniffs out the truth from the competing arguments. Lynn Winmill is a 1977 Harvard Law graduate who has been a judge since 1987, and district court judge since 1995. Here are  Judge Winmill’s own words candling out the maliferous mess of the plaintiff’s preservation failures. (For ease of reading I have deleted Judge Winmill’s many citations to the record.)

Here, Scentsy, the plaintiff, did not issue a written litigation hold to anyone at Scentsy. Instead, its General Counsel, Eric Ritter, “spoke to the individuals that would have information regarding Harmony Homes or the subject warmers, and asked—requested that those documents not be deleted ….” There is some dispute about when Scentsy first anticipated litigation in this matter, with Harmony suggesting it was May 2010, and Scentsy suggesting it was March 2011. The lawsuit was filed in May 2011. Ritter issued his oral litigation hold “roughly concurrent with the filing of the Complaint.” Scentsy’s document retention policy routinely deletes emails, but not other documents, that are over six months old.

Id. at *7.

Other parts of the opinion explain that any user can delete any of their documents at any time, including their email and attachments, at their own discretion and judgment. One custodian could keep all of their documents forever, another can delete right away. The email system has an automated deletion system in place where all email and attachments are deleted after six months. (The opinion does not say if custodians can circumvent that by creating their own personal archives, PST files, but I strongly suspect they can.) Aside from email, no other Scentsy document repository had an auto-delete function in place.

Scentsy’s failure to create a consistent documents retention policy, including email, was an error that set up this spoliation attack. Judges tend to react adversely to a complete laissez-faire, do whatever you want type of non-policy. Many users like that kind of freedom, but it creates additional organizational risk when faced with litigation. That is one reason why most experts today recommend consistent ESI retention policies as a best practice. The policies must be closely integrated with litigation hold policies and procedures.  This is a critical part of pre-suit litigation readiness, which is the first step in the ten-step attorney-centric EDBP. All e-discovery lawyers should be familiar with litigation readiness best practices and try to help their clients to implement them.

Now back to the Scentsy story.

Harmony suggests that Scentsy has failed to produce key documents because of an insufficient litigation hold. Essentially, Harmony accuses Scentsy of spoliation. Spoliation occurs when a party destroys or alters evidence, or fails to preserve evidence for another party in pending or reasonably foreseeable litigation. Harmony asks the Court to compel Scentsy to conduct a forensic exam of its own computer systems at its own expense to retrieve any deleted discoverable data, or to order other appropriate sanctions.

Id. at *6.

It was easy for defendants here to prove Scentsy had destroyed evidence after a hold was instituted. If nothing else, email was automatically destroyed after it hit its six-month trigger for auto-delete. The only real problem defendants had for a spoliation claim was to show that any of the email deleted was actually ESI relevant to this law suit. Defendants cleverly did not seek over-kill as punishment for the spoliation. They did not seek case-ending sanctions or the close-second, an adverse inference instruction. Instead, they sought very expensive studies, forensic exams, of Scentsy’s computers. Those exams might show relevant evidence had been destroyed, or they might not. But it was win-win for defendants because of the enormous burden the costs of the exercise would place on the plaintiff. The plaintiff might be forced to accept a low-ball settlement offer rather than pay for the forensic exams. Yes, there is a lot of strategy and posturing going on here. I think that Judge Winmill understood all of that perfectly well, as you will see in a minute by his remedy. But first, he sniffs out more of the key facts of Scentsy’s cascading errors.

Here, Scentsy, the plaintiff, did not issue a written litigation hold to anyone at Scentsy. Instead, its General Counsel, Eric Ritter, “spoke to the individuals that would have information regarding Harmony Homes or the subject warmers, and asked—requested that those documents not be deleted ….” There is some dispute about when Scentsy first anticipated litigation in this matter, with Harmony suggesting it was May 2010, and Scentsy suggesting it was March 2011. The lawsuit was filed in May 2011. Ritter issued his oral litigation hold “roughly concurrent with the filing of the Complaint.”  Scentsy’s document retention policy routinely deletes emails, but not other documents, that are over six months old.

Id. at *7.

The Court has serious concerns with Scentsy’s retention policy and litigation hold process. Generally not deleting documents, and orally requesting certain employees to preserve relevant documents concurrently with filing a lawsuit, is completely inadequate. It is very risky—to such an extent that it borders on recklessness. However, in this case there is very little chance that any of the documents at issue in the pending motion were destroyed because of the policy. The Court has been provided with no reason to question Scentsy’s representation that the bulk of the documents were inadvertently destroyed when Stewart’s hard drive crashed, and that this occurred before Scentsy even knew about Harmony. Scentsy has provided the Court with testimony, given under oath, to that effect. Harmony has provided no evidence to the contrary.

Id. at *8.

Note Judge Winmill dislikes both Scentsy’s ad hoc retention policies, and its loose, ineffective, litigation hold policies. But the defendants could offer no evidence that Scentsy’s negligence, even though it was gross, and bordered on recklessness, actually caused any damage. Instead, the evidence seemed to suggest that the only critical evidence lost was caused by an accidental hard drive crash. No proximate causation. Still, Judge Winmill did not like what he had seen here, and wanted to leave the door open for defendant to sniff around some more for any indications of bad faith by Scentsy.

However, there is a chance that some documents— particularly those related to the three warmers designed by someone other than Stewart—were destroyed after Scentsy anticipated this litigation. Scentsy’s Vice President of Information Technology states that “[a]ll non e-mail documents saved to an employee’s personal computer hard drive or to the Scentsy server are preserved indefinitely.” However, Scentsy’s General Counsel, Eric Ritter, suggests there really is no retention policy for such documents. He does state that “[f]iles other than emails are stored in accordance with the file creator’s intent. In other words, we don’t delete data off of user drives.” Same goes for an Illustrator or Adobe file on a shared drive. But he further states that if anybody at Scentsy created a Word document on their user drive, it “would remain there until [he or she] removed it from the user drive.” The same is true for the Illustrator and Adobe files on a shared drive. Illustrator documents, which were typically used to design the warmers, were kept on personal computers or the Scentsy Server.

Id. at *8.

This quote shows how ad hoc, every-man-for-themselves type retention policies and practices can come back to bite you when litigation erupts. The danger from these loosey-goosey, non-existent policies was compounded ten-fold by the failure to implement a proper litigation hold in a timely manner.

Ritter did not issue his oral litigation hold until “roughly concurrent with the filing of the Complaint.” Thus, even if the Court accepts Scentsy’s argument that it did not anticipate litigation until March 2011, there is at least a two-month window where these documents could have been destroyed by a user after Scentsy anticipated litigation if they were saved on a user computer or the server. If you accept Harmony’s contention that Scentsy anticipated litigation as early as May of 2010, the window grows to 12 months. Regardless of which you accept, the Court recognizes that the likelihood that this occurred is slight. However, there is no way to know, and that uncertainty was caused by Scentsy’s inadequate retention policy coupled with its late and imprecise litigation hold.

Id. at *8.

Again, the one-two punch is at work to harm Scentsy here: the inadequate retention policy, and imprecise litigation hold. Scentsy could have avoided both of these problems, and have been in a better position to prevail in this litigation, had it employed best practices in litigation readiness to tighten up these policies and protocols.

Proportional Remedy

Now we come to the all important remedy part of the opinion. Here note Judge Winmill’s wise application of the proportionality doctrine. As is often the case, he applies the doctrine without ever using the term proportionality, but by citing to a secondary proportionality Rule 26(b)(2)(B), which in turn cites to the primary proportionality Rule 26(b)(2)(C).

*9 The remedy for Scentsy’s inadequate policies is not simple to craft. Scentsy explains that, based upon a quote from an outside vendor, completing a forensic examination of its computer system would be lengthy and costly—even into the millions of dollars. Harmony does not dispute this. Thus, ordering the forensic exam under these circumstances would be an undue burden and cost. Fed.R.Civ.P. 26(b)(2)(B).

However, Scentsy should not be completely let off the hook simply because the cost is high. As explained above, the Court has inherent power to make evidentiary rulings in response to the destruction of relevant evidence if spoliation occurs before the litigation is filed. Unigard Security Insurance Co. v. Lakewood, 982 F.2d 363 (9th Cir.1992). Under these circumstances, the Court will allow Harmony to depose the appropriate individuals—whether it be the individuals who designed the three warmers not designed by Stewart, or someone else at Scentsy—to determine whether anyone destroyed relevant documents regarding those warmers. The deposition costs, including Harmony’s attorney fees for taking the depositions, shall be paid by Scentsy. If information is uncovered that spoliation occurred, the Court will consider giving an adverse inference instruction at trial or dismissing some or all of Scentsy’s claims. Spoliation is a serious matter, and Scentsy’s document retention and litigation hold policies are clearly unacceptable. The Court assumes that Scentsy will improve those policies in any future litigation. The failure to do so may result in this or some other court finding that Scentsy’s failure to act, in the face of the warnings given in this decision, constitutes the kind of wilfullness or recklessness which may result in serious repercussions.

Id. at *9.

Judge Winmill’s Message to the Bar

Judge Winmill here gives the plaintiff Scentsy a clear warning, either improve your retention and preservation policies now, or I will be even tougher against you if this ever comes up again in a future case in my court. This also constitutes a warning to all litigants who may come into Judge Winmill’s court, or I suggest, to any court that follows his common sense approach.

Judge Winmill goes on to make a point of emphasizing his displeasure of the plaintiff’s slipshod preservation. All judges are like that, as well they should. Justice needs the facts, needs evidence. If one side destroys the evidence, either on purpose, or by negligence, and the other side does not, then it gives the negligent side an unfair advantage. Judges must keep the courts balanced and fair. That is why judges are angered by negligent preservation, and why all lawyers should be intense, even to the point of rudeness, to try to force their clients to take not only basic reasonable efforts, but best efforts, to save the truth. That will earn you the respect of the presiding judge and give you some leeway when some mistakes are inevitably made.

Obviously best practices were not employed here and Judge Winmill responds as you would expect.

While it is unlikely that relevant documents were destroyed, we can never be certain. That uncertainty, which can only be attributed to Scentsy’s inadequate retention policies and litigation hold, is very troubling to the Court. Moreover, the Court views spoliation as a very serious matter with potentially serious consequences for the parties. Accordingly, the Court has, in essence, sanctioned Scentsy by requiring it to pay the deposition costs as outlined above, and by giving Scentsy a shot across the bow that if there is evidence that spoliation occurred, future consequences will be harsh.

Id.

I have no doubt that Judge Winmill means what he says. If these depositions uncover even a whiff of bad faith, you can bet this case will quickly go away.

Conclusion

Lawyers should engage in preservation activities in every case. Although you can agree with opposing counsel to forgo e-discovery in a case and not search for or produce clients ESI, and, believe it or not, most lawyers still do that, you cannot agree to forgo preservation. No lawyers do that, although some may informally agree not to look too closely at each others preservation. If one side screws up, the other side is likely to use that to their advantage, to press for sanctions.

Of course, you cannot complain about the other side’s failures if your side has also screwed up. You must have your own preservation house in order before you can attack and get anywhere with it. Otherwise you are likely to have the judge throw up his or her hands and say a pox on both your houses.

This is exactly what Judge Lucy Koh did recently when she entered adverse inference sanctions against both Apple and Samsung for failure to preserve ESI. Apple v. Samsung, U.S.D.C., N.D. Ca., Case No.: 11-CV-01846-LHK, Document 1894, Filed 08/21/12. It is well worth reading to see how both sides screwed up preservation in the hottest case of 2012. The spoliation issues were not settled until just a few days before the trial began. I am sure the trial lawyers on both sides could have done without those distractions.

All good lawyers these days are concerned with their client’s preservation of ESI. They do not want their case to be over before it even gets started. The dark clouds of looming spoliation can do that. That is why strong preservation efforts are necessary in every case.

In Electronic Discovery Best Practices – EDBP – we have identified three basic preservation attorney tasks: Hold Notices, Interviews and Collections. They are the second, third and fourth steps in the ten-step attorneys work flow. These preservation activities should ideally all flow out of the first step of litigation readiness. Scentsy Inc. v. B.R. Chase LLC demonstrates the importance of this. They should also be connected with the fifth Cooperation step. Disclosure of preservation at a 26(f) conference is contemplated by the rules. This forces any objections, and if none are made, can protect a party from later attack.

Here is the outline EDBP has so far for these preservation activities:

• Hold Notices
  • Notify Custodians 
  • Notify IT
  • Preserve in Place
• Witness Interviews
• Collections
  • Self Collection
  • Bulk Collection by IT
  • Cross-Border Issues (when international ESI collection is involved)

There may well be more basic attorney preservation activities that should be included in the basic outline of best practices. We welcome your contributions. As you can see from the comments at the end of the EDBP preservation page, one suggestion for witness Interviews is now under consideration. Many more details will be added in the coming months.

As a concluding comment I would like to emphasize the importance of applying the proportionality doctrine to preservation. Some cases are so small, and notice so premature, as is typical for instance in a pre-suit employee EEOC charge, that only the bare minimum preservation activities are required. The only thing that might be proportional for some cases is to send out a written hold notice, and nothing more. It may be sufficient to just instruct key custodians to preserve in place and not alter or destroy specified information. Immediate interviews and collection activities might not be required. In other cases you might want to notify, and interview, but defer any collection.

There is no one-size-fits-all reasonable response that is appropriate for every case, or even every type of case. There is only a minimum standard of putting notices in writing. A carefully crafted litigation hold policy should specify proportional efforts, and not require all-out efforts for every suit. Beyond the written notice, it all depends. It depends on the facts and proportionality analysis. That is where a skilled and experienced attorney is worth a thousand new lit-hold software programs. It is the carpenter, not the hammer, that builds the house of holds. Of course, it is nice to have good software too. Any carpenter still stuck with a hand saw spreadsheet to track lit-holds will tell you that.