Second Circuit Uses “Klipsch” to Speak Loud and Clear on e-Discovery Misconduct

September 23, 2018

Klipsch makes some of the best speakers in the world, especially their high-end Klipschorn speaker series shown here. The Second Court of Appeals used a Klipsch in a dispute recently to sound an alarm about e-discovery abuse and how it will not be tolerated. Klipsch Group, Inc. v. ePRO E-Commerce Ltd., 880 F. 3d 620 (2d Cir, 2018). The unanimous opinion written by Circuit Judge Gerard E. Lynch upheld the lower court’s sanctions against Klipch’s adversary in the suit, ePro. The adverse inference sanction entered means that Klipsch will now almost certainly win the case.

The Second Circuit also affirmed the full amount of monetary sanctions, $2,680,000. Klipsch was compensated for almost* all of the additional discovery efforts occasioned by ePRO’s misconduct. ePro was also required to immediately secure payment of the full $5 Million amount of any future judgment against them, which includes damage trebling and fees. I know that sounded great to Klipsch and their attorneys. Especially since they had a four day evidentiary hearing on their spoliation motion to get there.

* Somewhat sadly for Klipsch, however, as the third footnote explained, under the lower court’s opinion all of Klipsch’s fees and costs incurred were not awarded. There was another $300,000 or so that was not included, only because Klipsch could not produce proper credentials for one of the billing attorneys. Ouch. That is extremely rare and odd. Details are so very important.

The Second Circuit Court’s Rare Ruling on e-Discovery and Sanctions

The Klipsch opinion has language that will carry great weight, not only because it makes sense, but also because it is from a United States Court of Appeals panel. There are not that many appeals court opinions on sanctions or e-discovery so this is a rare and important opinion. It will certainly encourage more courts to do as the trial judge did here and sanction offending parties. It is also controlling law for all federal courts in its jurisdiction, which is Vermont, Connecticut and the all important New York.

In the rest of this blog I will let the language of the Klipsch opinion speak for itself with a few of my favorites selections. Klipsch Group, Inc. v. ePRO E-Commerce Ltd., 880 F. 3d 620 (2d Cir, 2018). The first quote from Circuit Judge Gerard Lynch’s opinion lays out the background.

In the course of defending against claims that it sold counterfeit products, defendant-appellant ePRO E-Commerce Limited (“ePRO”) engaged in persistent discovery misconduct: it failed to timely disclose the majority of the responsive documents in its possession, restricted a discovery vendor’s access to its electronic data, and failed to impose an adequate litigation hold even after the court directed it to do so, which omission allowed custodians of relevant electronic data to delete thousands of documents and significant quantities of data, sometimes permanently. As a result, the United States District Court for the Southern District of New York (Vernon S. Broderick, J.) concluded that ePRO had willfully engaged in spoliation. It accordingly granted in substantial part plaintiff-appellee Klipsch Group, Inc.’s (“Klipsch”) motion for discovery sanctions, including a $2.7 million monetary sanction to compensate Klipsch for its corrective discovery efforts and a corresponding asset restraint in that amount, permissive and mandatory jury instructions, and an additional $2.3 million bond to preserve Klipsch’s ability to recover damages and fees at the end of the case. . . .

We find no error in the district court’s factual findings, and we conclude that the monetary sanctions it awarded properly compensated Klipsch for the corrective discovery efforts it undertook with court permission in response to ePRO’s misconduct. In particular, we emphasize that discovery sanctions should be commensurate with the costs unnecessarily created by the sanctionable behavior. A monetary sanction in the amount of the cost of discovery efforts that appeared to be reasonable to undertake ex ante does not become impermissibly punitive simply because those efforts did not ultimately uncover more significant spoliation and fraud, or increase the likely damages in the underlying case. The district court’s orders imposing sanctions *624 are accordingly AFFIRMED in all respects.

The next quote gives you a good glimpse into the degree of frustration that recalcitrant attorneys who excel in gamesmanship can engender, even in an appellate court panel located in New York City:

[T]he history of the case makes clear that the sanctions and fees awarded in this case were carefully limited to costs Klipsch incurred in direct response to ePRO’s misconduct. Klipsch obtained approval from the magistrate judge prior to each of its substantive efforts, and in each case, that approval was given only after ePRO had already squandered an opportunity to correct its own errors.

For example, ePRO’s failure to implement a litigation hold was first discovered in March 2013, during Klipsch’s first round of depositions with ePRO employees, but ePRO was not sanctioned at that time, nor was Klipsch given carte blanche to explore ePRO’s files. Instead, ePRO was permitted to hire its own discovery expert to correct the error, which resulted in the production of substantial additional discovery. Klipsch then spent approximately $550,000 on a second round of depositions occasioned by that late production.

Paul Klipsch

It is evident that the district court did not detect any abusive conduct on the part of Klipsch, such as the piling on of discovery demands and investigatory initiatives in order to burden its *633 adversary with wasteful expenses, motions practice, and sanctions. ePRO does not appear to contest the reasonableness of permitting Klipsch to take those remedial depositions, nor can it plausibly assert that Klipsch would have insisted on doing so even if ePRO’s initial production had been complete or timely. And only in March 2014, after ePRO had repeatedly shown itself to be an untrustworthy participant in the discovery process, did the magistrate judge determine that Klipsch was “fully justified” in seeking to undertake an independent forensic examination. Joint App. at 1187.

Because the costs for which Klipsch is being compensated were reasonably incurred in direct response to ePRO’s misconduct, we cannot conclude that the district court abused its discretion by requiring ePRO to pay monetary sanctions in that amount.[7]

The defendant ePro then tried the “proportionality card” arguing that the multi-million dollar punitive damages exceeded the amount at issue in the case. That did not work. The Second Circuit explained that is not how proportionality works in sanctions. It has no bearing to the value of the case itself, just the amount of additional reasonable costs incurred because of the unreasonable conduct to be sanctioned. One party should not be damaged by the unreasonable conduct of the other. The offended party, here Klipsch, should, in effect, be indemnified from all of the burden and expense incurred because of what the offending party did or did not do. They are the innocent party. Here is how the court put it.

In sum, we see nothing in ePRO’s proportionality arguments compelling us to conclude that the district court abused its discretion by awarding full compensation for efforts that were ex ante a reasonable response to ePRO’s own evasive conduct.[9] The proportionality that matters here is that the amount of the sanctions was plainly proportionate — indeed, it was exactly equivalent — to the costs ePRO inflicted on Klipsch in its reasonable efforts to remedy ePRO’s misconduct.

The Second Court was cognizant of the issues and problems concerning electronic discovery. They had been briefed on the potential for misuses of spoliation sanctions motions. Although this was not at all present in the Klipsch, Judge Lynch address this concern near the end of the opinion.

Nothing that we say in this opinion should be taken as condoning excessive and disproportionate discovery demands, countenancing the tactical use of discovery sanction motions to inflict gratuitous costs on adversaries, or derogating from the responsibility *636 of district courts to ensure that litigation proceeds in a responsible and cost-efficient manner. See Fed. R. Civ. P. 1 (directing that the Rules of Civil Procedure “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action”) (emphasis added); Fed. R. Civ. P. 26(b)(1) (scope of discovery should be “proportional to the needs of the case, considering [inter alia] the amount in controversy”). If it turns out, as the district court has estimated, that the amount of actual damages in this case is modest in relation to the costs spent on the litigation, that would be a highly regrettable outcome.

But the question before the district court, and before us, is which party should be held responsible for those costs. ePRO does not ever contend that Klipsch’s initial discovery demands were unreasonable or disproportionate to the merits of the case. Nor does it seriously argue that the magistrate judge erred in allowing Klipsch to take the steps it took to remedy ePRO’s refusal to comply with those demands. The district court reasonably concluded, after a full and fair hearing, that it was ePRO’s noncompliance with its legal obligations that occasioned the excessive costs in this case, and we find no reason why ePRO should not therefore be required to pay them.

I leave you with a short video biography of Paul Klipch, a recognized audio engineer leader whom I have long admired.


The Importance of Witness Interviews: ‘What Happens in Vegas Shouldn’t Stay in Vegas’

September 16, 2018

A discovery order in Vegas shows the importance of witness interviews and what can happen when you take a cavalier attitude towards preservation. Small v. University Medical CenterCase No. 2:13-cv-0298-APG-PAL (D.C. Nev., 9/9/18) (FLSA class action seeking unpaid wages for skipped meal breaks). The lengthy order is entitled Report and Recommendation and Final Findings of Fact and Conclusions of Law and imposes severe sanctions on the defendant. The order proves, when it comes to e-discovery at least, what happens in Vegas doesn’t stay in Vegas. The truth does and should come out, including where’s the electronic evidence. Interviews are a good way to find out what really happened.

This is a long blog – 5,122 words – but it is still a lot shorter than the 123 page Short opinion, which is not short at all. I counted, it is 48,980 words. Not that I’m complaining, but it is one of the longest discovery orders I have ever read. It has many good instructional elements. Specialists should probably read and skim the whole opinion.

The Short opinion also has the distinction of having taken longer to prepare than any other discovery order I have ever read – FOUR YEARS! Can you imagine any decision taking that long? I am sure there were good reasons, but still. That is a full presidential term.

First Steps of e-Discovery: Prepare and Preserve

The FLSA suit arose from a DOL investigation that faulted the defendant employer hospital, UMC, for failing to keep “accurate records” of the time worked. UMC’s alleged records failures continued after it was sued. They failed to give timely preservation notices and failed to interview key custodians. That’s a failure of the first two legal tasks a lawyer is required to do in Electronic Discovery Best Practices (EDBP), steps two and three (step one is prepare). See EDBP.com (detail shown above right with all ten legal activities shown below); also see: Favro, Phillip, Vegas Court Spotlights the Importance of Custodian Interviews with New ESI Sources (LegalTech News 8/30/18) (further discussed below); John Patzakis, Three Key eDiscovery Preservation Lessons from Small v. University Medical Center (Next Generation eDiscovery Blog, 9/12/18).

Judge Peggy Leen’s Order

Magistrate Judge Peggy A. Leen is the learned judge who wrote the opinion in Small v. University Medical Center, Report and Recommendation and Final Findings of Fact and Conclusions of Law. The order affirms and implements most of the recommendations of the Special Master for e-Discovery appointed several years ago in this case, Daniel Garrie.

The Special Master’s Report was issued four years earlier on August 18, 2014, two years after the suit was filed in July 2012. The Report was notable for characterization of defendant’s discovery misconduct as so egregious as to “shock the conscience” and make “a mockery of the orderly administration of justice.” It was a long, complicated report.

When she completed her work she ruled in large part for the plaintiffs and  sanctioned the defendant:

VI. THE COURT’S FINDINGS AND CONCLUSIONS

The court has personally conducted a thorough review of the record prior to the special master’s appointment and the record of the proceedings conducted by the special master. The record before the court and the record developed by the special master amply supports his findings that UMC destroyed evidence by failing to identify, preserve, collect, process, and search multiple repositories of information relevant to the parties’ claims and defenses.

UMC failed to preserve several different types of ESI, including an estimated 26,000 text messages and 38,000 documents from a shared drive “containing human resources, corporate compliance, employee grievance, payroll, and DOL investigation data.” The documents lost include important policy and procedure manuals regarding meal breaks and compensation. Relevant ESI on laptops, desktops and local drives were not preserved until some 18 months into the litigation. UMC also failed to comply with multiple discovery orders, leading to the plaintiffs’ motions for sanctions.

Judge Leen did not follow the recommendation of the Special Master to impose a sanction of default judgment in favor of 613 class members on the Fair Labor Standards Act claims. Instead, she imposed a permissive adverse inference jury instruction, along with monetary sanctions. These jury instructions can have a profound impact on the jury, but not as  strong as a mandatory adverse inference instruction. The mandatory instruction almost always leads to a verdict against the spoliating party. The permissive kind of instruction imposed here still gives a defendant like UMC a chance. The sanctioned party can still prevail with a jury on the merits of the case, albeit a slim chance. Here is the specific language that Judge Leen suggested be used at trial with the jury:

2. UMC is sanctioned in the form of an instruction to the jury that the court has found UMC failed to comply with its legal duty to preserve discoverable information, failed to comply with its discovery obligations, and failed to comply with a number of the court’s orders. The instruction will provide that these failures resulted in the loss or destruction of some ESI relevant to the parties’ claims and defenses and responsive to plaintiffs’ discovery requests, and that the jury may consider these findings with all other evidence in the case for whatever value it deems appropriate.

Careful study of the long opinion shows a very practical, albeit unstated reason for Judge Leen to make this concession. It made her order much harder to appeal; some would say appeal-proof. (After you put four years into something you want it to last.) That is because near the end of the process at one of the hearings Judge Leen was able to get defendant’s own attorney to concede that an adverse inference jury instruction would be appropriate. You do not see that happen very often. But this attorney apparently saw the writing on the wall from the comments the judge was making and realized that accepting a permissive inference was the best they could hope for and certainly a lot better than default judgments for all 613 class members.

Here is Judge Leen’s explanation of how this admission came about.

During oral argument on its objections to the special master’s R & R, counsel for UMC stated “I’m not even going to tell you that I don’t think we shouldn’t be sanctioned.” (Hr’g Tr. 24:28-25:1, Oct. 21, 2014, ECF No. 229.) When asked what sanction he felt was appropriate based on the developed record, UMC’s counsel suggested that an adverse inference jury instruction would be appropriate. (Tr. 25:4-10.)

Here we see a wise and experienced judge in action. Too bad Peggy Leen retires in 2019.

Judge Leen had good reason under the law to hesitate to enter default judgments on 613 claims, effectively ending the cases except to determine the amount of damages, all without any hearing on the merits of the claims. Entry of the  lesser sanction of a permissive instruction was consistent with Judge Leen’s analysis of Rule 37(b) on sanctions for violation of court orders.

[T]he court cannot conclude that UMC’s multiple discovery failures and failure to comply with the court’s orders threatens to interfere with the rightful decision of this case on the merits.

The lesser sanction was also consistent with her analysis of 2015 revisions to Rule 37(e) on sanctions for ESI spoliation, Rule 1 on just-speedy-inexpensive, and Rule 26(b)(1) on proportionality. Here is Judge Leen’s well-accepted analysis of 37(e):

To summarize, the court may impose sanctions against UMC under the current version of Rule 37(e) only if it finds: (1) UMC failed to preserve ESI “that should have been preserved” in anticipation or conduct of litigation; (2) the information was lost because UMC failed to take reasonable steps to preserve it; (3) the ESI cannot be restored or replaced; and (4) the plaintiffs were prejudiced by the loss. If all of these prerequisites are met, the court may issue sanctions no greater than necessary to cure the prejudice caused by the loss. Only if the court finds UMC acted with intent to deprive may the court impose the most severe sanctions.

Judge Leen then applied the law to the facts.

The court has found that UMC failed to preserve ESI that should have been preserved in anticipation of litigation, and throughout the course of this litigation. The court has also found that the information was lost because UMC failed to take reasonable steps to preserve it. Thousands of text messages on UMC Blackberry devices were lost and cannot be restored. Tens of thousands of files from the Q-Drive were lost and cannot be restored prior to December 2013. . . .

However, the special master’s extraordinary expertise and persistence resulted in restoration, remediation, and production of a great deal of relevant and discoverable ESI. The special master was able to direct restoration of the time tracking systems UMC failed to disclose until near the end of special master proceedings. Fortunately, Jackie Panzeri, UMC’s payroll manager who described herself as a “pack rat” that “keeps documents forever” had a lot of documents on her personal drive and several archives full of emails she did not delete or modify. She was involved in the DOL investigation from the beginning and saved both documents collected and produced to the DOL and for this case. The court is also mindful that ESI is stored in multiple locations and that modified or lost data from the seven key custodians is likely to be found in other locations. . . .

Although the court finds plaintiffs have been prejudiced by the loss of data from key repositories and custodians, the loss has not threatened to interfere with the rightful decision of the case on its merits given the large volume of ESI the special master was able to ensure that UMC produced. For these reasons, the court finds that lesser sanctions are appropriate, proportional, and no greater than necessary to cure the prejudice caused by the loss of ESI uncovered by the special master.

As you can see, hope springs eternal. Judge Leen’s still thinks that the now lost ESI from the seven key custodians is likely to be found in other locations. 

I doubt the Special Master Garrie would share the same optimism. He has already called defendant’s conduct a mockery of the orderly administration of justice. In his Report the Special Master said he has “serious doubts that UMC can complete discovery in a defensible manner going forward without increased candor to the Court and their own counsel, and more competent technical assistance.’ Well, maybe they will change. If not, and Judge Leen is wrong and the missing ESI is not found, then Judge Lee or her successor might reconsider and upgrade the sanction to a mandatory adverse inference. Special Master Garrie may yet get his way.

Defendant’s Threshold Errors

The quotes below from Small summarize the key factual findings of defendants’ threshold errors, the ones that lead to most of the others (emphasis added), much like a domino effect. To me these are the most important errors made and you should study Judge Leen’s words here closely.

D. UMC Executives Failed to Accept Responsibility for Ensuring that ESI was Preserved and Failed to Notify Key Custodians and IT Staff to Preserve, and Prevent Loss, or Destruction of Relevant, Responsive ESI

The record amply supports the special master’s findings that UMC had no policy for issuing a litigation hold, and that no such hold was issued for the first eight months of this litigation until after Mr. Espinoza was deposed on April 8, 2013, and was asked about UMC’s response to plaintiff’s August 6, 2012 preservation letter. The special master accurately found that UMC executives were unaware of their preservation duties, ignored them altogether, or at best addressed them “in the hallway in passing.” . . .

The special master’s finding that UMC executives failed to accept responsibility for their legal duty to preserve is amply supported in the record. UMC executives and counsel failed to communicate with and provide adequate instructions to the department heads and IT personnel of repositories containing discoverable ESI to prevent the loss or destruction of potentially relevant ESI. . . .

There is no evidence in the record, and UMC does not suggest there is any, that current or former counsel gave instructions to UMC to suspend business as usual to prevent the destruction, deletion or modification of ESI responsive to plaintiffs’ discovery requests. . . .

It is also undisputed that UMC’s prior and current counsel failed to conduct timely custodian interviews. Custodian interviews were not conducted until well into the special master proceedings when it became apparent they had not been done. The special master required the interviews to be conducted a second time because the initial custodian interviews conducted by counsel were inadequate. . . .

There is ample support in the record that UMC executives displayed a cavalier attitude about their preservation obligations addressing them in passing, and that UMC executives repeatedly took the position in declarations and testimony that responsibility for preservation was someone else’s job. . . .

The special master correctly found that current and former counsel failed to conduct timely custodian interviews to identify individuals with discoverable information and key repositories of discoverable ESI.

The record in this matter is very complex and voluminous. That is why the Special Master Report and the Order by Judge Leen are so lengthy; 123 pages for the order alone. Suffice it to say, if witness interviews of key custodians been conducted when they should have, shortly after suit was filed, a great deal of relevant evidence that ultimately was lost could have been saved. The Special Master’s detailed findings make that obvious. The lost-files could have been identified and preserved unaltered. Lines of responsibility to comply with legal preservation obligations could have been clarified and enforced. Had these interviews been conducted, and the ESI found quickly, the relevant ESI could have been bulk-collected and the evidence saved from spoliation.

As it is, the actions and mistakes of defendant here have severely weakened their case. That’s what can easily happen when a company has a cavalier attitude to compliance with their legal obligation to preserve potentially relevant ESI.

Eight Failed Challenges to the Special Master’s Report

Judge Leen considered and rejected eight challenges to the Special Master’s report that were raised by the defendant employer, UMC:

  1. Competence and Impartiality of the Special Master, Daniel Garrie.
  2. UMC’s Failure to Comply with the Court’s Orders to Preserve and Produce ESI.
  3. UMC’s Failure Have a Preservation Policy or Litigation Hold Policy and Failure to Timely Implement One.
  4. UMC’s Executives Failure to Accept Responsibility for Ensuring that ESI was Preserved and Failure to Notify Key Custodians and IT Staff to Preserve, and Prevent Loss, or Destruction of Relevant, Responsive ESI.
  5. UMC’s Failure to Disclose the Existence of Relevant ESI Repositories, Including Multiple Timekeeping Systems and the Q-Drive Until Late in the Special Master Proceedings.
  6. UMC Modified, Lost, Deleted and/or Destroyed ESI Responsive to Plaintiffs’ Discovery Requests.
  7. UMC’s Failure to Comply with its Legal Duty to Preserve, Failure to Put in Place a Timely Litigation Hold, Failure to Comply with Multiple Court Orders to Preserve and Produce Responsive ESI, and Loss and Destruction of Responsive ESI (1) Necessitated the Appointment of a Special Master, (2) Caused Substantial Delay of these Proceedings, and (3) Caused Plaintiffs to Incur Needless Monetary Expenses.
  8. The Special Master Correctly Concluded UMC Repeatedly Misrepresented the Completeness of its Production of Documents Produced to DOL; However, UMC Was Not Ordered to Produce Kronos Payroll Data in Spreadsheet Format.

Defendants failed in their challenges to the Special Master’s findings, including the threshold challenge to Special Master Dan Garrie’s competence. Ouch! Garrie is a Senior Managing Partner of Law & Forensics. He has written numerous articles and books on law, technology and e-discovery. See eg. D. Garrie & Yoav Griver. Dispute Resolution and E-Discovery, Thomson Reuters (2nd ed. 2013). Garrie earned a Masters degree in computer science at Brandeis University before going on to law school. A challenge to his expertise was misplaced.

The challenge did not go over well with the supervising Judge who studied his work more closely than anyone. After emphatically rejecting the hospital arguments, Judge Peggy Leen stated:

The court has conducted a de novo review of all of the special master proceedings and finds that he was professional and courteous, if occasionally frustrated by testimony displaying a lack of appreciation of UMC’s legal duties to preserve and produce responsive ESI. He was repeatedly told by UMC executives and employees that they did not know about their duty to preserve, had not learned about their preservation obligations from counsel, did not know what a litigation hold was, and had not explored relevant repositories of information responsive to plaintiffs’ discovery requests.

Bench Slap of Defendant’s Attorneys

With a background like that it is not surprising that the Special Master uncovered so much evidence of incompetence and malfeasance in preserving evidence. Judge Leen held: (emphasis added)

UMC was on notice that its timekeeping, time systems, payroll policies, and procedures were relevant to this litigation. UMC also knew it was unable to document that employees were being compensated for actual time worked. Both UMC and its former and current counsel failed to comply with UMC’s legal duty to suspend routine document retention/destruction policies to ensure the preservation of relevant documents. UMC failed to communicate the need to preserve relevant documents and ESI to employees in possession or likely to be in possession of discoverable information, or for that matter to communicate this duty even to “key players.” UMC and its counsel failed to identify, locate, and maintain information relevant to specific, predictable, and identifiable claims involved in this litigation.

Note that Judge Leen goes out of her way to include the defendant and its lawyers in the blame, both its  prior attorneys and its present attorneys. All of these attorneys failed in the “legal duty to suspend routine document retention/destruction policies to ensure the preservation of relevant documents.” In situations of shared blame like this the attorneys involved are sometimes personally sanctioned along with the client, but this has not happen here. Judge Leen did make several sharp comments against the defendants lawyers, includi9ng this finding:

UMC’s current counsel blamed former counsel and their ESI consultants for the delay in producing responsive ESI. Counsel for UMC advised the court at the hearing on June 25, 2013, that the client did not have any real understanding of what MPP had done or what data had been collected. This representation turned out to be false. . . . Thus, the representation UMC’s current counsel made to the court that the client did not have any real idea of what prior counsel had done regarding ESI collection was patently false. In the light most favorable to current counsel, they did not ask the right questions of the individuals involved in the initial collection. The people involved in the process— MPP, its vendors and consultants, and the IT personnel at UMC who did the collection of ESI from 26 custodians—were simply not asked until after the special master was appointed and made the appropriate inquiries.

You do not see comments like that very often. Basically the judge is saying you lied to me and I cannot trust you. Again, more conscience shocking conduct by these attorneys, well outside the norm of accepted behavior.

Importance and Art of Custodian Interviews

The interviews that eventually were taken under the Special Master’s order and supervision show that critical evidence could have been saved from routine destruction, if the interviews been done at the time the suit was filed, not years later. The interviews would have ensured that preservation notices were properly given, understood and followed, and the right ESI was collected and effectively searched. See William A. Gross Construction Associates, Inc. v. American Manufacturers Mutual Insurance Co., 256 F.R.D. 134, 136 (S.D.N.Y. 2009) (custodian interviews to assist also in keyword search formulation).

It is important to note that the custodian interviews in Small had to be done twice. The attorneys botched the first attempt at witness interviews. They were ordered to do it again. I am not surprised. Many people underestimate the complexity and sophistication of interviews in cases like this. They also underestimate the wiliness of custodians and tendency of some of them to evade questions.

It is very difficult for most attorneys to conduct an interview on the subject of information storage, IT systems, company document storage systems, email, texts, other personal messaging, social media, personal computers, phones, other devices and  software programs used. Questions on these subjects are very different from questions on the merits of a case. A good custodian interview requires special technical knowledge and skills, which, unfortunately, most lawyers still lack. Too bad, because witness interviews are so very important to big cases with complex, messy ESI systems.

Philip Favro, an expert consultant for Driven, Inc., makes this point well in his excellent article on Small:

Fulsome custodian interviews are essential for ensuring that relevant electronically stored information (ESI) is preserved. Such interviews are characterized by exhaustive questioning on any number of topics including traditional and newer sources of ESI.

Properly conducted, custodian interviews should provide counsel with a thorough understanding of the nature and types of relevant information at issue in the litigation, together with the sources where that information is located. If custodian interviews are neglected or deficient, parties are vulnerable to data loss and court sanctions. The Small v. University Medical Center case is instructive on these issues.

Vegas Court Spotlights the Importance of Custodian Interviews with New ESI Sources (LegalTech News 8/30/18).

Phil’s explanation of some of the facts behind the Special Master ordered redo of the interviews shows how difficult some custodian interviews can be, especially when they want to hide something from the lawyers:

Once conducted, the interviews were deemed insufficient by the special master and (later on) the court. In its order, the court spotlighted some of the evasive answers that UMC’s custodians provided. For example, UMC’s director of human resources disclosed the existence of only one relevant timekeeping application despite having approved the use of other timekeeping systems for certain employees. UMC argued that its HR director was only obligated to disclose the timekeeping application he actually used:

[The custodian] did not use those applications himself and therefore had no obligation to disclose these systems in custodian interviews ordered by the special master because a “custodian interview is aimed at uncovering the applications, systems, programs, data with which the actual custodian interfaces.” (emphasis added).

The court decried this limited notion of a custodian interview, observing that it failed to satisfy UMC’s “legal obligation to identify, locate, maintain, and produce relevant information.”

In Small they never did any custodian interviews until after the case blew up and a Special Master was appointed. Even when interviews were finally conducted by defense counsel, they did a poor job; they were not well-informed of the client IT systems and were not “tough enough” with the interviewees. They seemed to be easily deceived and accepted evasive, incomplete answers. You must cross-examine and be the devils advocate for effective interviews, especially when the custodian is evasive.

Favro recommends:

Interviews should go beyond cursory questioning and focus instead on identifying all sources of relevant information. Nor should they be limited to safe topics like “where can relevant messages be found in your email account” or “where are relevant documents stored on your laptop.” Interviews should now include questions regarding the existence of information exchanged through new communications media or stored in online locations . . .

There is an art to interviews like this. The witnesses have to be comfortable telling you the truth, the full truth, without fear of reprisals. Assurances of confidentiality and witness protection can be a good tongue loosener, but do not mislead them. Remind them who you represent, typically at the very beginning.

Trust, friendliness and rapport are important in interviews, but fear has its place too. I like to tell the witness up front how important it is for them to be fully truthful and candid. A short, but stern formal reminder can go a long way if delivered properly. Since interviews are usually not under oath this is especially important. Some formality is important as part of the tongue-loosening process. Moreover, interviews like this are typically done one-on-one with no court reporter and no written statement for the witness to read and sign at the end. An interview is just two people talking, one asking all of the questions, preferably face-to-face and preferably in the witnesses office with their computer equipment at the ready to show you something, if need be.

To encourage full honesty and to help get at the truth I also sometimes inform a witness that they will likely be deposed and subject to intense cross-exam by opposing counsel. (I might possibly exaggerate the adversaries capabilities from time to time.) I point out how it will all be under oath and penalty of perjury. Then I start my role of the devils advocate, saying these are the kind of questions you will be asked, and then tear into them and make sure the story is straight and the memory not too patchy. Hey, do not get mad at me for pressing on you; these are the kind of questions you can expect and we have to be prepared. That works. Fear can be a powerful motivator of truth. So can good cross-exam. The carrot and stick approach is usually effective.

Another important guardian of truth is for the questioning attorneys to be able to look the witness in the eye and follow exactly what they are saying; full technical understanding of the ESI questions. Do not speak the language? Too technical? Then bring a translator, an expert. Do not allow the witness to speak over your head. They may well be bs-ing you. Nodding your head at everything said, even when you do not understand, is a natural lawyer tendency that you must fight against. Do not be afraid to ask stupid questions. When it comes to technical interviews of any kind I interrupt and ask questions all of the time. Much of the language used in tech and e-discovery is vague and subject to multiple meanings. You need to ask questions. Only a fool is afraid to ask questions for fear of seeming foolish.

Good interviews are a best practice to start e-discovery off right and protect clients from wasted expense and unnecessary risks. See the fine article on point by Kelly Twigger, 5 Things A Great Custodian Interview Can Do For Your Case And Your Budget (Above The Law, 6/27/17).

Proper custodian interviews require skill and training. They require the attorney or paralegal doing the interview to have a basic understanding of technology, communications software and social media. It can be challenging in some situations and even advanced practitioners need a good detailed outline to do it right. Make sure your law firm or law department has a good ESI custodian interview outline. I suggest having both a short and long form. These help even experienced lawyers to make sure they do not forget to ask something.

Expert consultants like Kelly Twigger of ESI Attorneys can help you to prepare good outlines and other tools. They can also do the most challenging tasks for you, such as prepare custom Preservation Notices, conduct Custodian Interviews, supervise ESI Collection, attend the 26(f) conference and prepare an ESI discovery plan, and ultimately, document search, review and production. An e-discovery expert can make it far easier and less expensive to stay current with the many technical-legal issues in the field.

A custodian interview can provide a wealth of information to help lawyers to find and save important evidence, but only if done properly by skilled legal practitioners. Do not risk the judge ordering a redo. Make sure you do a proper interview of the key custodians as soon as possible

Conclusion

Small shows what can happen when you take a cavalier attitude towards ESI preservation and interviews. Small v. University Medical CenterCase No. 2:13-cv-0298-APG-PAL, Report and Recommendation and Final Findings of Fact and Conclusions of Law dated August 9, 2018. Preservation errors at the beginning of a case can easily cascade into serious negligence and ESI destruction. This often results in sanctions motions and discovery about discovery. That diverts everyone from the merits of the case. In Small the sanctions not only included a permissive inference jury instruction, but also monetary sanctions, amount yet to be determined. What happened to the defendant in federal court in Vegas in Small is something that you should fear and loathe ever happening to you.

Proper timely custodian interviews could have prevented the loss of data in Small, could have prevented any sanctions. We all know that what happens in Vegas does not stay in Vegas, at least not when discovery in a law suit is concerned. The truth will come out as it should. This is especially true in a case like Small with misconduct that shocks the conscience in a mockery of justice, as Special Master Dan Garrie put it back in 2014.

Early custodian Interviews are an important, well-accepted best-practice, especially in a large matter like Small v. UMC. Interviews are the third step in the ten-step best practices of Electronic Discovery shown below. Electronic Discovery Best Practices (EDBP.com). They are one of three important activities that attorneys must perform in every law suit to preserve potential electronic evidence (shown in blue in the diagram below): hold notices, interviews and ESI collections.

See EDBP on Preservation.

In a large firm like mine, which only does Labor and Employment law, you can use one of the specialists in e-discovery to assist in these tasks, at least until you become proficient on your own. Specialists in large firms are usually experienced attorneys that now limit their work to e-discovery. (I recommend against specializing too early, but some are able to do it effectively.) In my firm there is only one full-time specialist, me, but I have over fifty attorney liaisons to assist. They have special training in e-discovery and are the go-to e-discovery lawyers for their office (we have 50), but they spend most of their time in employment litigation and other services outside of e-discovery. Other large firms have more full-time e-discovery specialists, but fewer part-time specialists. I decided to try to spread out the knowledge.

One of the things a specialists do, full or part-time, is help to create and update good standard witness interview question outlines for use by other attorneys in the firm. For instance, I have both a long and short form that I recently updated. Your firm probably has something similar. If not, do it now. Better late than never.

If you are in a smaller firm and do not have a full-time specialist in your ranks, then you should consider retaining an outside specialist as co-counsel in larger e-discovery matters. They can help you to save on overall costs and, most importantly, prevent a disaster like Small v. University Medical Center from ever darkening your door.

 

 

 


“Save Everything” and Eventually You Will Not Be Able to Find Anything: The Sedona Conference Principles and Commentary on Defensible Disposition

August 13, 2018

If you are a data hoarder, an information pack-rat that saves everything, you will eventually drown in your own data and die. Maybe not literally killed, mind you, but figuratively. Maybe not you personally, but your enterprise, your group, your project, your network. Too much information can render you and your enterprise intellectually paralyzed, cut off and seriously misinformed or uninformed. Saving it all is physically and logistically difficult, if not possible. Even if you could, keeping it all would impede your search, making it hard to find the information you need, when you need it. I address these issues this week in my review of a new commentary by The Sedona Conference Principles and Commentary on Defensible Disposition (August 2018).

Information overload is better than physical death I know, but still very bad in today’s Google world. You end up not being able to find the information you need, when you need it. That makes it hard to determine what really happened. It allows lies and liars to fester and grow. We are now seeing firsthand in the U.S. where this can lead. It is not good. It has put the whole world into a precarious situation. We need the truth to thrive as a culture; not smoke and mirrors, not conman games. A culture built on lies is a cancer. It is a deadly disease, especially for the Law, which depends on truth, on evidence, on real facts, to attain the goal of Justice.

Saving Too Much

Over-retention is the enemy of effective, efficient search. The more ESI there is to search, the more difficult the search. There can be exceptions to this rule, but for the most part it is true. That makes a “save everything” ESI policy an enemy of search. It interferes with the ability to find the information needed, which in my case is electronic evidence in legal proceedings, when it is needed. It is important for these information needs be filled quickly and completely.

Search is powerful. That is my field. The more data the better, is often true, but not always. It depends on the data and its effective life, how long a particular type of data is of any use to anyone. Big data allows for detection of patterns that would otherwise not be seen. This analysis takes CPU power. The advances in this area have been fantastic. We have the processing power, as well as the cheap storage, but our search and retrieval software has not otherwise kept up with the data explosion in volume and complexity. Predictive coding software and other AI applications have come a long way, but are still sometimes confused by the volume, variety and complexity of useless data that plagues most company IT systems.

Retrieval of specific documents and metadata takes time and specialized human skills. The more worthless data in a collection, such as spam, the greater the number false positives in a search, no matter how powerful the algorithms or skilled the searcher. Vast volumes of data make searches longer to execute and less precise. The more noise in the data, the more difficult to hear the signal. That is a fundamental law of information.

With high data volumes you can often still find the signal, the relevant documents that you need in large chaotic data collections, but it takes time and special tools and skills. There are often too many false positives in searches of data collections containing too much spam-like, useless data. Although search is strong, search alone is inadequate to meet the needs of most organizations. They also need data destruction and retention policies that govern all information. That is one reason why the success of information governance depends on data disposition.

An organization should save as much as it needs, but not too much, and also not too little. It is a Goldilocks situation. If you do not save data, you can never find it. If you save too little, then what you later need might not be there to be found. But if you save too much, you may never be able to find what you need. The signal may be in the collection to be found, in plain view, but hidden in the vast numbers, the noise of spam and other irrelevancies.

Search v. Destroy

I have debated Information Governance leaders for years the importance of search versus file destruction. I was pretty much the only advocate for search over disposition. I favored retention over destruction in most close cases, but I had a cost and proportionality overlay. I am reminded, for instance, of my debate with Jason Baron on the subject at the IQPC 10th Anniversary of Information Governance and eDiscovery, where he managed to quote Churchill at the end and won the debate hands-down. e-Disco News, Knowledge and Humor: What’s Happening Today and Likely to Happen Tomorrow (e-Discovery Team, June 7, 2015); Information Governance v Search: The Battle Lines Are Redrawn (e-Discovery Team, Feb. 8, 2015).

I did not consider it a fair debate because of Jason’s very successful pandering to the jury during his closing argument with a quote by Churchill from his speech, We Shall Fight on the Beaches. That’s the one about never surrendering in the fight against “the odious apparatus of Nazi rule” (sadly, this exhortation still has legs today in the US).

The debate was “unfair” primarily because this was an IG conference. Everybody in IG is pro-destruction and values disposition over search. I think most IG leaders go too far, that they are trigger happy to kill data. I pointed out in my debates that once a file is deleted, it cannot be found, no matter how good your filing, no matter how good your search (forensic recovery issues aside).

I am pro-search and think that the importance of management of ESI by filing and disposition is somewhat overblown. I think search is king, not data deletion. Still, even in my most strident of debates and pro-search arguments, I never advocated for the retention of all data. I always assumed that some file disposition was required and accepted that as a given. I was not a save everything and search advocate. I advocated for both, search and destroy. I advocated for more retention than most, but have never argued to retain everything.

There is a common core of agreement that some ESI should be deleted, that all data should not be saved. The disagreement is on how much data to save. How does a person or company know what is the “just right” data destruction policy for that company? There is agreement among experts that there is no one-size-fits-all solution, so custom work is required. Different retention and destruction policies should apply depending on the company and the particularities of their data universe. Many IG specialists advise clients on the custom fit they need. It involves careful investigation of the company, its data and activities, including law suits and other investigations.

The Sedona Conference  Principles and Commentary on Defensible Disposition

Kevin Brady

Kevin Brady

These IG specialists, and the companies they serve, now have an excellent new resource tool to analyze and custom-fit data destruction policies. The Sedona Conference Principles and Commentary on Defensible Disposition (August 2018 Public Comment Version) (Editors-in-Chief, Kevin F. Brady and Dean Kuckelman). I highly recommend this new and excellent work by The Sedona Conferences. My commendations to the Drafting Team: Lauren A. Allen, Jesse Murray, Ross Gotler, Ken Prine, Logan J. Herlinger, David C. Shonka, Mark Kindy; the Drafting Team Leaders: Tara Emory and Becca Rausch; the Staff Editor: Susan McClaim, and Editors-in-Chief, Kevin F. Brady and Dean Kuckelman. Please send to them any comments you may have.

The Commentary begins in usual Sedona fashion by articulation of basic principles and comments tied to principles. The cases and legal authorities cited in all Commentaries by The Sedona Conference are excellent. This commentary on data disposition is no exception. I commend it for your detailed study and reference. Free download here from The Sedona Conference.

The Principles are:

PRINCIPLE 1.    Absent a legal retention or preservation obligation, organizations may dispose of their information.

Comment 1.a.   An organization should, in the ordinary course of business, properly dispose of information that it does not need.

Comment 1.b.   When designing and implementing an information disposition program, organizations should consider the obligation to preserve information that is relevant to the claims and defenses and proportional to the needs of any pending or anticipated litigation.

Comment 1.c. When designing and implementing an information disposition program, organizations should consider the obligation to preserve information that is relevant to the subject matter of government inquiries or investigations that are pending or threatened against the organization.

Comment 1.d.   When designing and implementing an information disposition program, organizations should consider applicable statutory and regulatory obligations to retain information.

PRINCIPLE 2.    When designing and implementing an information disposition program, organizations should identify and manage the risks of over-retention.

Comment 2.a.   Information has a lifecycle, including a time when disposal is beneficial.

Comment 2.b. To determine the “right” time for disposal, risks and costs of retention and disposal should be evaluated.

PRINCIPLE 3.    Disposition should be based on Information Governance policies that reflect and harmonize with an organization’s information, technological capabilities, and objectives.

Comment 3.a.   To create effective information disposition policies, organizations should establish core components of an Information Governance program, which should reflect what information it has, when it can be disposed of, how it is stored, and who owns it.

Comment 3.b. An organization should understand its technological capabilities and define its information objectives in the context of those capabilities.

Document Disposition and Information Governance

The Sedona Conference Principles and Commentary on Defensible Disposition builds upon Sedona’s earlier work, the Sedona Conference Commentary on Information Governance (Oct. 2014). Principle 6 of the Commentary on Information Governance provides the following guidance to organizations:

The effective, timely, and consistent disposal of physical and electronic information that no longer needs to be retained should be a core component of any Information Governance program. The Sedona Conference, Commentary on Information Governance, 15 SEDONA CONF. J. 125, 146 (2014) (“Information Governance” is “an organization’s coordinated, interdisciplinary approach to satisfying information compliance requirements and managing information risks while optimizing information value.” Id. at 126).

The Comment to Principle 6 goes on to explain:

It is a sound strategic objective of a corporate organization to dispose of information no longer required for compliance, legal hold purposes, or in the ordinary course of business. If there is no legal retention obligation, information should be disposed as soon as the cost and risk of retaining the information is outweighed by the likely business value of retaining the information. . . . Typically, the business value decreases and the cost and risk increase as information ages. Id. at 147.

The Sedona Conference concluded in 2018 that this 2014 advice, and similar advice from other sources, has not been followed by most organizations. instead, they continue to struggle to make “effective disposition decisions.” The group in Principles and Commentary on Defensible Disposition concluded in its Introduction that this struggle was caused by many factors, but identified the three main problems:

[T]he incorrect belief that organizations will be forced to “defend” their disposition
actions if they later become involved in litigation. Indeed, the phrase “defensible disposition” suggests that organizations have a duty to defend their information disposition actions. While it is true that organizations must make “reasonable and good faith efforts to retain information that is relevant to claims or defenses,” that duty to preserve information is not triggered until there is a “reasonably anticipated or pending litigation” or other legal demands for records. The Sedona Principles, Third Edition: Best Practices, Recommendations & Principles for Addressing Electronic Document Production, 19 SEDONA CONF. J. 1, 51, Principle 5, 93 (2018).

Another factor in the struggle toward effective disposition of information is the difficulty in appreciating how such disposition reduces costs and risks.

Lastly, many organizations struggle with how to design and implement effective disposition as part of their overall Information Governance program.

The Principles and Commentary on Defensible Disposition attempt to address these three factors and provide guidance to organizations, and the professionals who counsel organizations, on developing and implementing an effective disposition program.

Disposition Challenges

The Sedona Conference Principles and Commentary on Defensible Disposition (August, 2018) concludes by identifying the main challenges to data deletion.

  1. Unstructured Information.
  2. Mergers and Acquisitions.
  3. Departed, Separated, or Former Employees
  4. Shared File Sites
  5. Personally Identifiable Information (“PII”)
  6. Law Firms, eDiscovery Vendors, and Adversaries
  7. In-House Legal Departments
  8. Hoarders (my personal favorite)
  9. Regulations
  10. Cultural Change and Training

There are more, I am sure, but this is a good top ten list to start. I only wish they had included more discussion of these top ten.

Conclusion

Search is still more important for me than destroy. I prefer Where’s Waldo over Kill Waldo! I have not changed my position on that. But neither has mainstream Information Governance. They still disagree with my emphasis on Search. But everyone agrees that we should do both: Search and Destroy. Even I do not want companies to save all of their data. Some data should be destroyed.

I agree with mainstream IG that saving everything forever is not a viable information governance policy, no matter how many resources you also put into ESI search and retrieval. I have never said that you should rely solely on search, just that you should give Search more importance and, when in doubt, that you should save more documents than less. The Search and Destroy argument has always been one of a matter of degree and balance, not whether there should be no destruction at all. The difficult questions involve what should be saved and for how long, which are traditional information management problems.

Where to draw the line on destruction is the big question for everyone. The answer is always company specific, even project specific. It involves questions of varying retention times, files type and custodian analysis. When it comes down to specific decisions, and close questions, I generally favor retention. What may appear to be useless today, may prove to be relevant evidence tomorrow. I hate not being able to prove my case because all of the documents have already been deleted. Then it is just one person’s word against another. IG experts, who usually no longer litigate, or never litigated, do not like my complaints. They are eager to kill, to purge and destroy data. I am more inclined to save and search, but not save too much. It is a question of balance.

Data destruction – the killing of data – can, if done properly, make the search for relevant content much easier. Some disposition of obviously irrelevant, spam and otherwise useless information makes sense on every level. It helps all users of the IT system. It also helps with legal compliance. Too much destruction of data, too aggressive, and you may end up deleting information that you were required by law to keep. You could lose a law suit because of one mistake in a data disposition decision. Where do you draw the line between save and delete? What is the scope of a preservation duty? What files types should be retained? What retention times should apply? How much is too much? Not enough?

The questions go on and on and there is no one right answer. It all depends on the facts and circumstances of the organization and its data. The new Sedona Conference Principles and Commentary on Defensible Disposition is an important new guide to help IT lawyers and technologists to craft custom answers to these questions.

 


Waymo v. Uber, Hide-the-Ball Ethics and the Special Master Report of December 15, 2017

December 17, 2017

The biggest civil trial of the year was delayed by U.S. District Court Judge William Alsup due to e-discovery issues that arose at the last minute. This happened in a trade-secret case by Google’s self-driving car division, WAYMO, against Uber. Waymo LLC v. Uber Techs., Inc. (Waymo I), No. 17-cv-00939-WHA (JSC), (N.D. Cal. November 28, 2017). The trial was scheduled to begin in San Francisco on December 4, 2017 (it had already been delayed once by another discovery dispute). The trial was delayed at Waymo’s request to give it time to investigate a previously undisclosed, inflammatory letter by an attorney for Richard Jacobs. Judge Alsup had just been told of the letter by the United States attorney’s office in Northern California. Judge Alsup immediately shared the letter with Waymo’s attorneys and Uber’s attorneys.

At the November 28, 2017, hearing Judge Alsup reportedly accused Uber’s lawyers of withholding this evidence, forcing him to delay the trial until Waymo’s lawyers could gather more information about the contents of the letter. NYT (11/28/17). The NY Times reported Judge Alsup as stating:

I can no longer trust the words of the lawyers for Uber in this case … You should have come clean with this long ago … If even half of what is in that letter is true, it would be an injustice for Waymo to go to trial.

NYT (11/28/17).

Judge Alsup was also reported to have said to Uber’s lawyers in the open court hearing of November 28, 2017:

You’re just making the impression that this is a total coverup … Any company that would set up such a surreptitious system is just as suspicious as can be.

CNN Tech (11/28/17).

Judge Alsup was upset by both the cover-up of the Jacobs letter and by the contents of the letter. The letter essentially alleged a wide-spread criminal conspiracy to hide and destroy evidence in all litigation, not just the Waymo case, by various means, including use of: (1) specialized communication tools that encrypt and self-destruct ephemeral communications, such as instant messages; (2) personal electronic devices and accounts not traceable to the company; and, (3) fake attorney-client privilege claims. Judge Alsup reportedly opened the hearing on the request for continuance by admonishing attorneys that counsel in future cases can be “found in malpractice” if they do not turn over evidence from such specialized tools. Fortune (12/2/17). That is a fair warning to us all. For instance, do any of your key custodians use specialized self-destruct communications tools like Wickr or Telegram?

Qualcomm Case All Over Again?

The alleged hide-the-email conduct here looks like it might be a high-tech version of the infamous Qualcomm case in San Diego. Qualcomm Inc. v. Broadcom Corp., No. 05-CV-1958-B(BLM) Doc. 593 (S.D. Cal. Aug. 6, 2007); Qualcomm, Inc. v. Broadcom Corp., 2008 WL 66932 (S.D. Cal. Jan. 7, 2008) (Plaintiff Qualcomm intentionally withheld from production several thousand important emails, a fact not revealed until cross-examination at trial of one honest witness).

The same rules of professional conduct are, or may be, involved in both Qualcomm and Waymo (citing to ABA model rules).

RULE 3.3 CANDOR TOWARD THE TRIBUNAL
(a) A lawyer shall not knowingly:
(1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; . . .
(b) A lawyer who represents a client in an adjudicative proceeding and who knows that a person intends to engage, is engaging or has engaged in criminal or fraudulent conduct related to the proceeding shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal.

RULE 3.4 FAIRNESS TO OPPOSING PARTY AND COUNSEL
A lawyer shall not:
(a) unlawfully obstruct another party’s access to evidence or otherwise unlawfully alter, destroy, or conceal a document or other material that the lawyer knows or reasonably should know is relevant to a pending or a reasonably foreseeable proceeding; nor counsel or assist another person to do any such act.

Although, as we will see, it looks so far as if Uber and its in-house attorneys are the ones who knew about the withheld documents and destruction scheme, and not Uber’s actual counsel of record. It all gets a little fuzzy to me with all of the many law firms involved, but so far the actual counsel of record for Uber claim to have been as surprised by the letter as Waymo’s attorneys, even though the letter was directed to Uber’s in-house legal counsel.

Sarbanes-Oxley Violations?

In addition to possible ethics violations in Waymo v. Uber, a contention was made by the attorneys for Uber consultant, Richard Jacobs, that Uber was hiding evidence in violation of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, § 802, 116 Stat. 745, 800 (2002), which states in relevant part:

whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

18 U.S.C. § 1519. The Sarbanes-Oxley applies to private companies and has a broad reach not limited to litigation that has been filed, much less formal discovery requests. Section 1519 “covers conduct intended to impede any federal investigation or proceeding including one not even on the verge of commencement. Yates v. United States, – U.S. –, 135 S.Ct. 1074, 1087 (2015).

The Astonishing “Richard Jacobs Letter” by Clayton Halunen

The alleged ethical and legal violations in Waymo LLC v. Uber Techs., Inc. are based upon Uber’s failure to produce a “smoking gun” type of letter (email) and the contents of that letter. Although the letter is referred to as the Jacobs letter, it was actually written by Clayton D. Halunen of Halunen Law (shown right), an attorney for Richard Jacobs, a former Uber employee and current Uber consultant. Although this 37-page letter dated May 5, 2017 was not written by Richard Jacobs, it purports to represent how Jacobs would testify to support employment claims he was making against Uber. It was provided to Uber’s in-house employment counsel, Angella Padilla, in lieu of an interview of Jacobs that she was seeking.

A redacted copy of the letter dated May 5, 2017, has been released to the public and is very interesting for many reasons. I did not add the yellow highlighting seen in this letter and am unsure who did.

In fairness to Uber I point out that the letter states on its face in all caps that it is a RULE 408 CONFIDENTIAL COMMUNICATION FOR SETTLEMENT PURPOSES ONLY VIA EMAIL AND U.S. MAIL, a fact that does not appear to have been argued as a grounds for Uber not producing the letter to Waymo in Waymo v. Uber. That may be because Rule 408, FRCP, states that although such settlement communications are not admissible to “prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction” they are admissible “for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.” Also, Rule 408 pertains to admissibility, not discoverability, and Rule 26(b)(1) still says that “Information within this scope of discovery need not be admissible in evidence to be discoverable.”

The letter claims that Richard Jacobs has a background in military intelligence, essentially a spy, although those portions of the letter were heavily redacted. I tend to believe this for several reasons, including the fact that I could not find a photograph of Jacobs anywhere. That is very rare. The letter goes on to describe the “unlawful activities within Uber’ s ThreatOps division.” Jacobs Letter at pg. 3. The illegal activities included fraud, theft, hacking, espionage and “knowing violations” of Sarbanes-Oxley by:

Uber’ s efforts to evade current and future discovery requests, court orders, and government investigations in violation of state and federal law as well as ethical rules governing the legal profession. Clark devised training and provided advice intended to impede, obstruct, or influence the investigation of several ongoing lawsuits against Uber and in relation to or contemplation of further matters within the jurisdiction of the United States.  …

Jacobs then became aware that Uber, primarily through Clark and Henley, had implemented a sophisticated strategy to destroy, conceal, cover up, and falsify records or documents with the intent to impede or obstruct government investigations as well as discovery obligations in pending and future litigation. Besides violating 18 U.S.C. § 15 19, this conduct constitutes an ethical violation.

Pages 5, 6 of Jacobs Letter. The practices included the alleged mandatory use of a program called WickrMe, that “programs messages to self-destruct in a matter of seconds to no longer than six days. Consequently, Uber employees cannot be compelled to produce records of their chat conversations because no record is retained.” Letter pg. 6.

Remember, Judge Alsup reportedly began the trial continuance hearing of November 28, 2017, by admonishing attorneys that in future cases they could be “found in malpractice” if they do not turn over evidence from such specialized communications tools. Fortune (12/2/17). There are a number of other secure messaging apps in adddition to Wickr that have encryption and self destruct features. A few I have found are:

There are also services on the web that will send self-destructing messages for you, such as PrivNote. This is a rapidly changing area so do your own due diligence.

Uber CEO Dara Khosrowshahi reacted to the November 29, 2017 hearing and Judge Alsup’s comments by tweeting on November 29, 2017 that Uber employees did, but no longer, use Wickr and another program like it, Telegram.

True that Wickr, Telegram were used often at Uber when I came in. As of Sept 27th I directed my teams NOT to use such Apps when discussing Uber-related business.

This seems like a good move to me on the part of Uber’s new CEO, a smart move. It is also an ethical move in a sometimes ethically challenged Silicon Valley culture. The culture is way too filled with selfish Ayn Rand devotees for my taste. I hope this leads to large scale housekeeping by Khosrowshahi. Matt Kallman, a spokesman for Uber, said after the public release of the letter:

While we haven’t substantiated all the claims in this letter — and, importantly, any related to Waymo — our new leadership has made clear that going forward we will compete honestly and fairly, on the strength of our ideas and technology.

NYT (12/15/17). You know the old saying about Fool me once …

Back to the Jacobs letter, it also alleges at pgs. 6-9 the improper use of fake attorney-client privilege to hide evidence:

Further, Clark and Henley directly instructed Jacobs to conceal documents in violation of Sarbanes-Oxley by attempting to “shroud” them with attorney-client privilege or work product protections. Clark taught the ThreatOps team that if they marked communications as “draft,” asked for a legal opinion at the beginning of an email, and simply wrote “attorney-client privilege” on documents, they would be immune from discovery.

The letter also alleges the intentional use of personal computers and accounts to conduct Uber business that they wanted to hide from disclosure. Letter pgs. 7-8.

The letter at pages 9-26 then details facts purporting to show illegal intelligence gathering activities by Uber on a global scale, violating multiple state and federal laws, including:

  • Economic Espionage Act
  • Uniform Trade Secret Act
  • California Uniform Trade Secrets Act
  • Racketeer Influenced and Corrupt Organizations Act (RICO)
  • Wire Fraud law at 18 U.S.C § 1343, and California Penal Code § 528.5
  • Wiretap Act at 18 U .S.C. § 25 10 et seq.
  • Computer Fraud and Abuse Act (CFAA)
  • Foreign Corrupt Practices Act (FCPA)

Special Master John L. Cooper

Judge Alsup referred the discovery issues raised by Uber’s non-disclosure of the “Jacobs Letter” to the Special Master handling many of the discovery disputes in this case, John L. Cooper of Farella Braun + Martel LLP. The Special Master Report with Cooper’s recommendations concerning the issues raised by the late disclosure of the letter is dated December 15, 2017. Cooper’s report is a public record that can be found here. This is  his excellent introduction of the dispute found at pages 1-2 of his report.

The trial of this trade secrets case was continued for a second time after the belated discovery of inflammatory communications by a former Uber employee came to light outside the normal discovery process. On April 14, 2017, Richard Jacobs sent a resignation e-mail to Uber’s then-CEO and then-general counsel, among others, accusing Uber of having a dedicated division with a “mission” to “steal trade secrets in a series of code-named campaigns” and engaging in other allegedly wrongful or inappropriate conduct. A few weeks later, on May 5, 2017, Mr. Jacobs’ lawyer, Clayton Halunen, sent a letter to Angela Padilla, Uber’s Vice President and Deputy General Counsel for Litigation and Employment. That 37-page letter expanded in some  detail on Mr. Jacobs’ e-mailed accusations regarding clandestine and concerted efforts to steal competitors’ trade secrets, including those belonging to Waymo. It also addressed allegations touching on Anthony Levandowski’s alleged downloading of Waymo trade secrets. The Jacobs Letter laid out what his lawyer described as a set of hardware and software programs, and usage protocols that would help Uber to allegedly carry out its thefts and other corporate espionage in secret and with minimized risk of evidence remaining on Uber servers or devices. By mid-August Mr. Jacobs and Uber settled their disputes and executed a written settlement agreement on August 14-15,2017.

Despite extensive discovery and multiple Court orders to produce an extensive amount of information related to the accusations in the Jacobs Materials, Waymo did not learn of their existence until after November 22, when the Court notified the parties that a federal prosecutor wrote a letter to this Court disclosing the gist of the Jacobs allegations.

The Special Master’s report then goes on to analyze whether Uber was obligated to produce the Jacobs Materials in response to any of the Court’s prior orders or Waymo’s discovery requests. In short, Master Cooper concluded that they were not directly covered by any of the prior court orders, but the Jacobs Letter was responsive to certain discovery requests propounded by Waymo, and Uber was obligated to produce it in response to those requests.

Special Master Cooper goes on to describe at page 7 of his report the Jacobs letter by Halunen. To state the obvious, this is clearly a “hot” document with implications that go well beyond this particular case.

That 37-page letter set forth multiple allegations relating to alleged efforts by Uber individuals and divisions. Among other things, the letter alleges that Uber planned to use certain hardware devices and software to conceal the creation and destruction of corporate records that, as a result, “would never be subject to legal discovery.” See ECF No. 2307-2 at 7. These activities, Mr. Jacobs’ lawyer asserted, “implicate ongoing discovery disputes, such as those in Uber’s litigation with Waymo.” Id. at 9. He continued:

Specifically, Jacobs recalls that Jake Nocon, Nick Gicinto, and Ed Russo went to Pittsburgh, Pennsylvania to educate Uber’s Autonomous Vehicle Group on using the above practices with the specific intent of preventing Uber’s unlawful schemes from seeing the light of day.

Jacobs’ observations cast doubt on Uber’s representation in court proceedings that no documents evidencing wrongdoing can be found on Uber’s systems and that other communications are actually shielded by the attorney-client privilege. Aarian Marshall, Judge in Waymo Dispute Lets Uber’s Self-driving Program Live—for Now, wired.com (May 3, 2017 at 8:47p.m.) (“Lawyers for Waymo also said Uber had blocked the release of 3,500 documents related to the acquisition of Otto on the grounds that they contain privileged information …. Waymo also can’t quite pin down whether Uber employees saw the stolen documents or if those documents moved anywhere beyond the computer Levandowski allegedly used to steal them. (Uber lawyers say extensive searches of their company’s system for anything connected to the secrets comes up nil.)”), available at (citation omitted).

Id. at 9-10.

Uber Attorney Angela Padilla

Angella Padilla was Uber’s Vice President and Deputy General Counsel for Litigation and Employment. She testified on these issues. Here is Special Master Cooper’s summary at pages 8-9 of his report:

Ms. Padilla testified in this Court that she read the letter “in brief’ and turned it over to other Uber attorneys, including Ms. Yoo, to begin an internal investigation. Nov. 29, 2017 Hr’g Tr. at 15:17-24. The letter also made its way to two separate committees of Uber’s Board of Directors, including the committee that was or is overseeing special litigation, including this case and the Jacobs matter. Id. at 20:10-13; 26:23-25. On June 27, Uber disclosed the allegations in the Jacobs Letter to the U.S. Attorney for the Northern District of California. Id. at 27:20-14. It disclosed the Jacobs Letter itself on or around September 12 to the same U.S. Attorney’s Office, to another U.S. Attorney, in the Southern District of New York, and to the U.S. Department of Justice in Washington. Id. at 28:4-10. Ms. Padilla testified that Uber made these disclosures to multiple prosecutors “to take the air out of [Jacobs’] extortionist balloon.” Id. at 28:18-19. Nearly one month before that distribution of the letter to federal prosecutors, on August 14, Uber settled with Mr. Jacobs—the terms of which included $4.5 million in compensation to Jacobs and $3 million to his lawyers. See id. at 62:6-63-12.

I have to pause here for a minute because the settlement amount takes my breath away. Not only the payment of $4.5 Million to Richard Jacobs who had a salary of $130,000 per year, but also the additional payment of $3.0 million dollars to his lawyers. That’s an incredible sum for writing a couple of letters, although I am sure they would claim to have put much more into their representation than meets the eye.

Other Attorneys for Uber Involved

Back to Special Master Cooper’s summary of the testimony of Uber attorney Padilla and other facts in the record about attorney knowledge of the “smoking gun” Jacobs letter (footnotes omitted):

Uber distributed the Jacobs E-Mail to two of Uber’s counsel of record at Morrison Foerster (“MoFo”) in this case. See Dec. 4, 2017 Hr’g Tr. at 46:1-47:5. Other MoFo attorneys directly involved in this case and related discovery issues e-mailed with other MoFo attorneys in late April about “Uber’s ediscovery systems regarding potential investigation into Jacobs resignation letter.” See Waymo Ex. 21.

None of the Uber outside counsel working on this case got a copy of the Jacobs Letter. Neither did the two Uber in-house lawyers who were or are handling this case; Ms. Padilla testified that she did not send it to them. Nov. 29, 2017 Hr’g Tr. at 47:8-16. By late June, some attorneys from Boies Schiller and Flexner, also counsel in this matter for Uber, had discussions with other outside counsel and Ms. Padilla about issues arising from the internal investigation triggered by the Jacobs Materials. See Waymo Ex. 20, Entries 22-22(h).

So now you know the names of the attorneys involved, and not involved, according to Special Master Cooper at page 9 of his report. Apparently none of the actual counsel of record knew about it. I would have to assume, and I think the court will too, that this was intentional. It was so clever as to be obvious, or, as the British would say too clever by half.

U.S. Attorney Notifies Judge Alsup of the Jacobs Letter

To complete the procedural background, here is what happened next leading to the referral to the Special Master. Note that a U.S. Attorney taking action like this to notify a District Court Judge of a piece of evidence is extraordinary, especially to do so just before a trial. Judge Alsup said that he had never had such a thing happen in his courtroom. The U.S. Attorney for the Northern District of California is Brian Stretch. Obviously he was concerned about the fairness of Uber’s actions. In my opinion this was a good call by Stretch.

On November 22, 2017, the U.S. Attorney for the Northern District of California notified this Court of the Jacobs allegations and specifically referenced the account Jacobs put in his letter about the efforts to keep the Ottomotto acquisition secret. See ECF No. 2383. The Court on the same day issued an order disclosing receipt of the letter from the U.S. Attorney and asked the parties to inform the Court about the extent of any prior disclosure of the Jacobs allegations. See ECF Nos. 2260-2261. After continuing the trial date in light of the parties’ responses to that query, the Court on December 4, 2017, ordered the Special Master “to determine whether and to what extent, including the history of this action and both sides’ past conduct, defendants were required to earlier produce the Jacobs letter, resignation email, or settlement agreement, or required to provide any information in those documents in response to interrogatories, Court orders, or other agreements among counsel.” ECF No. 2334, 2341.

Special Master report at pgs. 9-10.

Special Master Cooper’s Recommended Ruling

Master Cooper found that the Richard Jacobs letter was responsive to two of Waymos’ requests to produce: RFP 29 and RFP 73. He rejected Uber’s argument that they were not responsive to any request, an argument that must have been difficult to make concerning a document this hot. They tried to make the argument seem more reasonable by saying that even if the letter was “generally relevant,” it was not responsive. Then they cite to cases standing for the proposition that you have no duty to produce relevant documents that you are not going to rely on, namely documents adverse to your position, unless they are specifically requested. Here is a quote of the conclusion of that argument from page 16 of Uber’s Response to Waymo’s Submission to Special Master Cooper Re the Jacobs Documents.

Congress has specified in Rule 26(a)(ii) what documents must be unilaterally produced, and they are only those that a party “may use to support its claims or defenses.” Thus, a party cannot use a document against an adversary at trial that the party failed to disclose. However, Rule 26 very pointedly does not require the production of any documents other than those that a party plans to use “to support” its claims. Obviously, Uber is not seeking to use any of the documents at issue to support its claims. If Waymo believes that this rule should be changed, that is an issue they need to address with Congress, not with the Court.

Master Cooper did not address that argument because he found the documents were in fact both relevant and directly responsive to two of Waymo’s requests for production.

Uber’s attorney also made what I consider a novel argument that even if the Jacobs letter was found to be responsive, they still did have to produce it because, get this – it did not include any of the keywords that they agreed to use to search for documents in those categories. Incredible. What difference does that make, if they knew about the document anyway? Their client, Uber, specifically including in-house counsel, Ms. Padilla, clearly knew about it. The letter was to her. Are they suggesting that Uber did not know about the letter because some of their outside counsel did not know about it? Special Master Cooper must have had the same reaction as he disposed of this argument in short order at page 17 of his report:

Uber argues, that in some scenarios, reliance on search terms is enough to satisfy a party’s obligation to find responsive documents. See, e.g., T.D.P. v. City of Oakland, No, 16-cv-04132-LB, 2017 WL 3026925, at *5 (N.D. Cal. July 17, 2017) (finding certain search terms adequate for needs of case). But I find there are two main reasons why an exclusive focus on the use of search terms is inappropriate for determining whether the Jacobs Letter should have been produced in response to RFP 29 and RFP 73.

First, the parties never reached an agreement to limit their obligation to searching for documents to only those documents that hit on agreed-upon search terms. See Waymo Ex. 5 (Uber counsel telling Waymo during search-term negotiations that “Waymo has an obligation to conduct a reasonable search for responsive documents separate and apart from any search term negotiations”). (Emphasis added)

Second, Uber needed no such help in finding the Jacobs Materials. They were not stowed away in a large volume of data on some server. They were not stashed in some low-level employee’s files. Parties agree to use search terms and to look into the records of the most likely relevant custodians to help manage the often unwieldy process of searching through massive amounts of data. These methods are particularly called for when a party, instead of merely having to look for a needle in a haystack, faces the prospect of having to look for lots of needles in lots of haystacks. This needle was in Uber’s hands the whole time.

I would add that this needle was stuck deep into their hands, such that they were bleeding profusely. Maybe the outside attorneys did not see it, but Uber sure did and they had a duty to advise their attorneys. Uber’s attorneys would have been better off saving their powder for attacking the accuracy of the contents of the Jacobs letter and talking about the fast pace of discovery. They did that, but only as a short concluding argument, almost an afterthought. See page 16-19 of Uber’s Response to Waymo’s Submission to Special Master Cooper Re the Jacobs Documents.

Here is another theoretical argument that Uber’s lawyers threw up and Cooper’s practical response at pages 17-18 of his report:

Uber argues that it cannot be that the mere possession and knowledge of a relevant document must trigger a duty to scrutinize it and see if it matches any discovery requests. It asked at the December 12, 2017, hearing before the Special Master: Should every client be forced to instruct every one of its employees to turn over every e-mail and document to satisfy its discovery obligations to produce relevant and responsive documents? Must every head of litigation for every company regularly confronted with discovery obligations search their files for responsive documents, notwithstanding any prior agreement with the requesting party to search for responsive documents by the use of search terms?

It is not easy, in the abstract, to determine where the line regarding the scope of discovery search should be drawn. But this is not a case involving mere possession of some document. The facts in this case suggest that Ms. Padilla knew of the Jacobs Letter at the time Uber had to respond to discovery requests calling for its production—it certainly was “reasonably accessible.” Mr. Jacobs’ correspondence alleged systemic, institutionalized, and criminal efforts by Uber to conceal evidence and steal trade secrets, and not just as a general matter but also specifically involving the evidence and trade secrets at issue in this case—maybe the largest and most significant lawsuit Uber has ever faced. Ms. Padilla, Uber’s vice president and deputy general counsel for litigation and employment received the Jacobs Materials around the same time that discovery in this case was picking up and around the same time that the Court partially granted Waymo’s requested provisional relief. Shortly after that, Uber told federal prosecutors about the Jacobs allegations and then later sent them a copy of the letter. It sent the materials to outside counsel, including lawyers at MoFo that Uber hired to investigate the allegations. Two separate Uber board committees got involved, including the committee overseeing this case. Uber paid Mr. Jacobs $4.5 million, and his lawyer $3 million, to settle his claims.

The Federal Rules obligate a party to produce known, relevant and reasonably accessible material that on its face is likely to be responsive to discovery requests. RFP 29 and RFP 73 were served on Uber on May 9, just a few days after Ms. Padilla received the Jacobs Letter on May 5. Uber was therefore obligated to conduct a reasonable inquiry into those requests (and all others it received) to see if it had documents responsive to those requests and produce non-privileged responsive documents.

Special Master John Cooper concluded by finding that the “Jacobs letter was responsive to Waymo’s Request for Production No. 29 and Request for Production No. 73, and Uber should have produced it to Waymo in response to those requests.” It was beyond the scope of his assignment as Special Master to determine the appropriate remedy. Uber will now probably challenge this report and Judge William Alsup will rule.

Like everyone else, I expect Judge Alsup will agree with Cooper’s report. The real question is what remedy will he provide to Waymo and what sanctions, if any, will Judge Alsuop impose.

Conclusion

At the hearing on the request for a trial delay on November 28, 2017, Judge William Alsup reportedly told Uber’s in-house attorney, Angella Padilla:

Maybe you’re in trouble … This document should have been produced … You wanted this case to go to trial so that they didn’t have the document, then it turns out the U.S. attorney did an unusual thing. Maybe the guy [Jacobs] is a disgruntled employee but that’s not your decision to make, that’s the jury’s.

The Recorder (November 29, 2017).

In response to Angella Padilla saying that Jacobs was just a “extortionist” and the allegations in his letter were untrue. Judge Alsup reportedly responded by saying:

Here’s the way it looks … You said it was a fantastic BS letter with no merit and yet you paid $4.5 million. To someone like me and people out there, mortals, that’s a lot of money, that’s a lot of money. And people don’t pay that kind of money for BS and you certainly don’t hire them as consultant if you think everything they’ve got to contribute is BS. On the surface it looks like you covered this up.

The Recorder (November 29, 2017).

Judge William Alsup is one of the finest judges on the federal bench today. He is a man of unquestioned integrity and intellectual acumen. He is a Harvard Law graduate, class of 1971, and former Law clerk for Justice William O. Douglas, Supreme Court of the United States, 1971-1972.  How Judge Alsup reacts to the facts in Waymo LLC v. Uber Techs., Inc. now that he has the report of Special Master Cooper will likely have a profound impact on e-discovery and legal ethics for years to come.

No matter what actions Judge Alsup takes next, the actions of Uber and its attorneys in this case will be discussed for many years to come. Did the attorneys’ non-disclosure violate Rule of Professional Conduct 3.3, Candor Toward the Tribunal? Did they violate Rule 3.4, Fairness to Opposing Party and Counsel? Also, what about Rule 26(g) Federal Rules of Civil Procedure? Other rules of ethics and procedure? Did Uber’s actions violate the Sarbanes-Oxley Act? Other laws? Was it fraud?

Finally, and these are critical questions, did Uber breach their duty to preserve evidence when they knew that litigation was reasonably likely? Did their attorneys do so if they knew of these practices? What sanctions are appropriate for destruction of evidence under Rule 37(e) and the Court’s inherent authority? Should an adverse inference be imposed? A default judgment?

The preservation related issues are big questions that I suspect Judge Alsup will now address. These issues and his rulings, and that of other judges who will likely face the same issues soon in other cases, will impact many corporations, not just Uber. The use of software such as Wickr and Telegram is apparently already wide-spread. In what circumstances and for what types of communications may the use of such technologies place a company (or individual) at risk for severe sanctions in later litigation? Personally, I oppose intentionally ephemeral devices, where all information self-destructs, but, at the same time, I strongly support the right of encryption and privacy. It is a question of balance between openness and truth on the one hand, and privacy and security on the other. How attorneys and judges respond to these competing challenges will impact the quality of justice and life in America for many years to come.

 


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