“Utmost Seriousness” Necessary in Preservation of Electronic Evidence

In an important new decision, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York has expanded upon her well-known Zubulake V opinion (229 F.R.D. 422 (S.D.N.Y. 2004)), setting forth crucial guidance for all parties to litigation as to their obligations to preserve and collect all potentially relevant records – whether paper or electronic – once litigation is reasonably anticipated, and providing an important example of the extremely serious consequences of failing to do so.

Pension Committee of the University of Montreal Pension Plan v. Bank of America Securities, Case No. 05 Civ. 9016 (SAS), involves an action under both the federal securities and New York State laws by a group of investors seeking to recover more than a half billion dollars in losses alleged to have resulted from the liquidation of two hedge funds in which they were investors. In her opinion, Judge Scheindlin closely reviews the discovery efforts of 13 plaintiffs and finds their failure to institute timely, written litigation hold notices, and their careless and indifferent collection efforts, resulted in the loss or destruction of evidence. Finding their conduct to be negligent or grossly negligent, Judge Scheindlin imposed sanctions, including a rebuttable adverse inference instruction, monetary fines, and, for two plaintiffs, limited additional discovery involving the search of their backup tapes.

Pension Committee sets the e-discovery bar high by holding that, “[a] failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, . . . even if it results from a pure heart and an empty head . . . and, depending on the circumstances, may be grossly negligent or willful.” The opinion (i) reiterates the need to issue a timely, written legal hold notice when litigation is “reasonably anticipate[d],” which may occur before litigation actually commences; (ii) cautions parties about relying on custodians to preserve and collect relevant evidence without supervision of counsel; (iii) stresses the obligation to secure the potentially relevant evidence of former employees and others – such as directors – that remains in the organization’s possession, custody, or control; (iv) discusses the need to preserve backup tapes when they are the sole source of potentially relevant information because the active files of key players are no longer available; and (v) reminds parties of the need to ensure scrupulous accuracy in their representations about preservation and collection activities to the court, and their duty to make available knowledgeable witnesses prepared to testify about “[w]hich files were searched, how the search was conducted, who was asked to search, what they were told, and the extent of any supervision . . . .”

Failure to have an internal, multidisciplinary e-discovery response team and a litigation readiness plan in place before a preservation obligation is triggered leaves an organization vulnerable to potentially outcome-determinative spoliation sanctions. All companies that face or plan for potential litigation – whether as plaintiff or defendant – should carefully examine their existing document retention practices, including especially their preparedness plans for the commencement of any litigation.