Eschewing the approaches taken by other jurisdictions, the Delaware Court of Chancery—widely regarded as the nation's preeminent forum for business litigation—has recently begun to chart a careful path through the minefield of electronic discovery.
Six years after the final Zubulake v. UBS Warburg LLC opinion—and despite additional guidance from the courts—litigants in disputes everywhere are still coming to terms with the problems associated with the discovery of electronically stored information (ESI). This article discusses developments since Zubulake and the ways in which courts and lawyers nationwide have approached e-discovery issues, including the cautionary tale of the recent Qualcomm v. Broadcom litigation. It then summarizes recent developments in the Delaware Court of Chancery—the nation's best-known business court—which for years had very little to say regarding e-discovery but has recently provided significant practical guidance to litigants.
Zubulake and the Promulgation of E-Discovery Standards
In Zubulake, the U.S. District Court for the Southern District of New York issued a series of opinions addressing parties' obligations to preserve and produce ESI. Issued prior to the 2006 revisions to the Federal Rules of Civil Procedure addressing ESI, the Zubulake opinions had a nationwide impact and set forth the following broad principles regarding discovery obligations:
- Once litigation is reasonably anticipated, a party must suspend its routine document retention and destruction practices and put in place a "litigation hold";
- Counsel must take steps to become familiar with the client's information and technology systems and see that the "key players" at the client comply with the litigation hold;
- Counsel must make clear that the production of active ESI is required, and that backup media are preserved; and finally
- Counsel's duties are continuing and include taking reasonable steps to monitor the client's compliance throughout the litigation.
The failure to comply with the foregoing may warrant sanctions, which in Zubulake included an award of attorneys' fees and a jury instruction permitting an "adverse inference" against the defendant, which ultimately led to a $29 million jury verdict.
The most notable post-Zubulake development in the field of e-discovery was the 2006 amendments to the Federal Rules of Civil Procedure in which the following amendments, among others, were enacted:
- Rule 26(b)(2) was amended to permit parties to initially withhold from production ESI that is "not reasonably accessible because of undue burden or cost"; however, the production of "not reasonably accessible" ESI may still be ordered where, under Rule 26(c)(2), the costs of discovery are outweighed by the potential benefits;
- Rules 26(f) and 16(f) were amended to require that e-discovery issues be raised at the parties' initial discovery conference and included in the Rule 26(f) report provided to the court, with any e-discovery disputes being addressed in the initial scheduling conference with the court; and
- Rule 37(e) was amended to clarify that sanctions should not be imposed where ESI is lost through the "routine, good faith operation of an electronic information system." The Advisory Committee notes indicate this refers to the "alteration and overwriting of information, often without the operator's specific direction or awareness, a feature with no direct counterpart in hard-copy documents." The notes further state that "good faith" includes compliance with applicable document preservation obligations where litigation is anticipated.
Further, Rule 26(b)(5) and Federal Rule of Evidence 502 were amended to require the prompt return of any inadvertently produced privileged information, and to clarify that such a production does not waive the privilege so long as the holder of the privilege was reasonably prudent in protecting it. These amendments recognized the burden and cost of a thorough privilege review by counsel in the digital age. They even go so far as to contemplate judicial endorsement of so-called quick-peek arrangements, under which producing parties attempt to control costs by agreeing to turn over a broad range of documents to the requesting party without a prior document-by-document review by counsel. The requesting party then indicates what subset of documents it would like produced, and the producing party then does a thorough review for privilege and any other applicable protection from discovery for that subset of documents. Relatedly, the amendments contemplate the use of so-called claw-back agreements, under which parties seek to reduce the costs of counsel screening voluminous ESI for privilege by requiring the swift return of any inadvertently produced materials, with a stipulation that such an inadvertent production will not result in the waiver of the privilege.
Many state courts soon adopted rules or guidelines based on similar principles. The North Carolina Business Court, for example, requires that before filing any motion or objection with respect to e-discovery, the parties shall discuss cost-shifting and other means of resolving the dispute, and file a certificate with the court detailing the results of their discussion. In addition, the Delaware Superior Court recently established a Complex Commercial Litigation Division, where cases are subject to an early scheduling conference, at which procedures for e-discovery will be court-ordered. Its guidelines also require an early meet and confer regarding e-discovery, with a written e-discovery plan to be submitted to the court prior to the scheduling conference. The New York state courts recently examined their practice and recommended pilot projects requiring early disclosures relating to electronic discovery, including disclosure of the parties' ESI preservation efforts, and requiring that counsel submit an "Affirmation of E-Discovery Compliance" before a preliminary conference with the court.
Apart from court rules and guidelines, a body of standards has emerged from groups with expertise in e-discovery, including the Sedona Conference and the Conference of Chief Justices, which has promulgated Guidelines for State Trial Courts Regarding Discovery of Electronically-Stored Information. Such sources set forth standards, like the Federal Rules, focusing on the need for (1) an early conference and agreements among counsel regarding e-discovery, (2) court supervision of the discovery process, (3) court-ordered approval of so-called claw-back and quick-peek arrangements, and (4) factors to consider with respect to an "undue burden" analysis and cost-shifting.
But under the Federal Rules and the other approaches, the determination of when a party should "reasonably anticipate" litigation, the parameters of a "reasonable" approach to collection and preservation, and what is an "undue burden" remain case-specific. The absence of bright-line rules has led to infamous circumstances where sophisticated counsel and clients have lost cases—either through a default judgment or in connection with an adverse inference—due to e-discovery violations. When things go wrong, counsel and their clients may point fingers at each other, and it is difficult to pinpoint where blame should lie.
The Cautionary Tale of Qualcomm v. Broadcom
These problems are perhaps best shown by the recently concluded case of Qualcomm, Inc. v. Broadcom Corp., 2008 WL 66932 (S.D. Cal. Jan. 7, 2008)—a patent case where, after Qualcomm lost at trial, Broadcom's counsel made an oral motion to have Qualcomm and its counsel sanctioned for discovery misconduct. This engendered three years of post-trial litigation (unrelated to the merits of the initial dispute) devoted to the issue of whether 19 attorneys from Qualcomm's team of outside counsel should be sanctioned for their failure to ensure that important e-mails from key Qualcomm staff were produced.
On the initial referral from the trial judge, a magistrate sanctioned Qualcomm and six of its outside attorneys. The judge found that those counsel "chose not to look in the correct locations for the correct documents, to accept the unsubstantiated assurances of an important client that its search was sufficient, [and/or] to ignore the warning signs that the document search and production were inadequate[.]" It reasoned that if counsel knew its client would not comply with discovery obligations, counsel were ethically obligated to withdraw from the representation. The judge ordered Qualcomm to pay approximately $8.5 million in Broadcom's attorneys' fees and referred each of the six counsel to the California State Bar for potential discipline.
The attorneys thereafter obtained a ruling that, because their client Qualcomm blamed them for the discovery misconduct, counsel could reveal otherwise privileged communications with Qualcomm under the self-defense exception to the privilege. The matter was remanded for reconsideration in light of the formerly privileged communications. 2008 WL 638108, at *3 (S.D. Cal. Mar. 5, 2008).
Additional litigation ensued, including extensive document discovery, 13 depositions, and a three-day evidentiary hearing, with the magistrate concluding in April 2010 that the attorneys' conduct did not amount to "bad faith" warranting sanctions. Quallcomm Inc. v. Broadcom Corps., 2010 WL 1336937 (S.D. Cal. Apr. 2, 2010). It concluded the discovery violations resulted from a lack of meaningful communication with the client regarding discovery obligations, a lack of oversight of the more junior lawyers doing discovery work, the failure to ensure that key witnesses' computers were searched after indications that they might contain relevant documents, and reliance upon the client's representations that additional searches of computers and laptops would be duplicative.
Despite the outcome, the litigation must have taken a significant toll. Five of the attorneys who were initially sanctioned were from the law firm of Day Casebeer Madrid & Batchelder, a firm that reportedly struggled financially after the initial imposition of sanctions, and that later merged with Howrey LLP. Four of the attorneys (including two partners) reportedly left the firm and large firm practice altogether. It has been suggested that, in ultimately declining to impose sanctions, the magistrate gave a pass to attorneys who had already been through enough.
The enduring problems of e-discovery recently prompted the judge who authored Zubulake to revisit its teachings in The Pension Committee of the University of Montreal Pension Plan v. Banc of AmericaSecurities LLC, 2010 WL 184312 (S.D.N.Y. 2010), where the court explained,
Courts cannot and do not expect that any party can meet a standard of perfection. Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party. As discussed six years ago in the Zubulake opinions, when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy.
Recent Developments in the Delaware Court of Chancery
In contrast to jurisdictions that reacted prospectively to e-discovery—and the headlines-creating sanctions handed down elsewhere—the Delaware Court of Chancery until recently has been silent on these issues. It did not amend its rules, none of which expressly touch on e-discovery, or issue any guidelines or standing orders. Perhaps the court believed that standards of "reasonableness" in discovery practice were already sufficiently reflected in its rules and jurisprudence, or that it need not order counsel to meet and confer, given that professionalism and prudence compel this anyway. Recent e-discovery disputes, however, have caused the court to issue rulings, summarized below, that have given more specific guidance. The court's rulings suggest that, while it will not hesitate to impose sanctions for the intentional or reckless destruction of ESI, it will generally defer to litigants' agreements regarding the contours of a reasonable approach to ESI. Further, while the burdens of e-discovery are frequently justified in the high-stakes business litigation in which the court specializes, the court nonetheless will take a case-by-case approach and consider reasonable measures to reduce the ultimate financial costs of e-discovery.
Recent Decisions Addressing Preservation and Spoliation
In several recent decisions, the Court of Chancery was confronted with cases involving the loss of ESI and made clear its expectations regarding parties' preservation obligations and the potential sanctions for causing the destruction of ESI after a preservation obligation attaches.
In Beard Research, Inc. v. Kates, 981 A.2d 1175 (Del. Ch. 2009), the failure to preserve ESI led to an adverse inference on key disputed facts. There, the plaintiff business accused the defendants—a former employee and a competing company—of misappropriating trade secrets. The former employee had made a particular presentation to the competitor, the only copy of which was on his employer-provided laptop. After the complaint was filed, the employee took actions resulting in ESI being purged from the laptop. The court set forth general principles to govern e-discovery disputes. It wrote that "absent affirmative steps to preserve it," some ESI is likely to be destroyed. It advised that "early and, if necessary, frequent communications among counsel" regarding e-discovery should occur. The court would likely defer to the parties' agreements regarding e-discovery, but if the parties did not address e-discovery issues early on, the court was "not likely to be sympathetic" to spoliation claims based on parties' failure to impose "stringent measures" to preserve ESI. The court indicated it would take a "reasonable" approach by "taking into account the insights provided by caselaw and some of the guidelines and principles developed by respected groups," specifically including the Sedona Conference and the Conference of Chief Justices.
In imposing sanctions against all defendants—not only the former employee, but also the competing business where he went to work—the court reasoned they were all represented by the same counsel, that counsel did not notify them of the need to preserve ESI, and also that the employee's current (co-defendant) employer should have known that he had a laptop he used for work. The court awarded attorneys' fees and an adverse inference against all defendants with respect to a key dispute: whether the former employee shared a specific list of proprietary chemical compounds with plaintiff's competitor.
Similarly, the Court of Chancery granted an adverse inference in Triton Construction Corp. v. Eastern Shore Electrical Services, Inc., 2009 WL 1387115 (Del. Ch. May 18, 2009), aff'd, 998 A.2d 938 (Del. 2010), another case involving an employee's alleged disloyal conduct toward his employer. After the employee had resigned his position in order to work with a competing company, he "wiped" a computer provided by his former employer, and otherwise failed to produce ESI from his home computer and a thumb drive. The court reasoned that the employee should have reasonably anticipated litigation when he resigned his position in order to work with a competing company. As a sanction, the court awarded an adverse inference supporting the former employer's claim that the employee shared confidential information with his new company.
More recently, in TR Investors LLC v. Genger, 2009 WL 4696062 (Del. Ch. Dec. 9, 2009), the court issued a post-trial decision on spoliation issues—what it deemed "an expensive case within a case." When litigation was filed for control of a corporation, counsel to an incumbent director and CEO attempted to protect his client's personal information and at the same time preserve potentially relevant documents. This was important to the client, who claimed to have various ESI of a sensitive, personal nature at the corporation. Unbeknownst to counsel, however, the client had an in-house IT worker permanently overwrite the unallocated space on his hard drive. Unallocated space contains temporary files, not visible in normal use, that are automatically saved. It could contain versions of files that are later changed or removed, such as drafts or deleted documents, and computer experts can access this information. When they later took control of the corporation, the plaintiffs' computer expert uncovered the defendant's actions.
Although it was impossible to know what information was lost, a certain memo was not produced by the defendant. The memo was relevant and had been produced by other recipients. If the defendant had received the memo by e-mail, and if he then deleted the e-mail, it could have been in the unallocated space. The defendant also had failed to produce eight other relevant e-mails that may have been in the unallocated space.
The court found defendant's actions to be reckless in that he proceeded without consulting with counsel, who he knew were engaged in preservation efforts. It found his purpose—at least in part—was to limit the information plaintiffs could use in litigation. The "reasonable probability" that relevant evidence was lost warranted sanctions. The court then awarded creative sanctions, including a limited waiver of the attorney-client privilege, imposing a higher burden of proof for his counterclaims, and ruling that he would be unable to meet his burden on any issue supported solely on his own testimony.
Diligence in Counsel's Collection of ESI
As practitioners in the court can attest, the Court of Chancery has high expectations for the conduct and professionalism of counsel appearing before it. The court has recently made clear that this expectation extends to counsels' responsibility to ensure that relevant ESI is collected and produced in discovery.
Two recent decisions of the court support that counsel are personally required to oversee the collection and production of ESI. In Grace Bros. v. Siena Holdings, Inc., 2009 WL 1547821 (Del. Ch. June 2, 2009), the court granted a motion to compel requiring a corporation to search individual directors' e-mail. Although counsel had inquired regarding the individual directors' e-mail practices—and may have reasonably believed that they had no "unique" responsive documents—this did not suffice to sustain its burden to show that a search of their e-mails would be unreasonably cumulative or duplicative. Similarly, in Roffe v. Eagle Rock Energy, G.P., C.A. No. 5208-VCL (Del. Ch. Apr. 8, 2010), the court required counsel to personally review client e-mail. Counsel claimed that the particular defendant kept work documents on his personal computer interspersed with personal e-mail (making a review difficult), and that he should have no "unique" e-mails. The court ruled "you do not rely on a defendant to search their own e-mail system," reasoning that experience showed clients' statements regarding what documents are available are not always true. It ordered counsel to "get on a plane" and review the e-mails. Roffe is particularly salient because it involved discovery to confirm the fairness of a class action settlement, a context that often involves relatively truncated discovery.
Rulings on the Burden of E-Discovery
When issues regarding the burden of e-discovery are properly presented to the court, it has been willing to work with litigants to reduce the costs of e-discovery. For years, the leading Court of Chancery e-discovery case addressing an "undue burden" argument in the context of e-discovery was Kaufman v. Kinko's, Inc., 2002 WL 32123851 (Del. Ch. Apr. 16, 2002), which considered whether a producing party had to initiate an ESI retrieval system that could cost up to $100,000. The court did not engage in a cost-benefit analysis. Rather, it reasoned that "[u]pon installing a data storage system, it must be assumed that at some point in the future one may need to retrieve the information previously stored." It reasoned that "deficiencies in the retrieval system (or inconvenience and cost associated with the actual retrieval) cannot be sufficient to defeat an otherwise good faith request" for discoverable ESI.
More recently, however, in Omnicare, Inc. v. Mariner Health Management Co., 2009 WL 155609 (Del. Ch. May 29, 2009), the court acknowledged that it had the discretion to shift the costs of production in an appropriate case. It said there was "wisdom" in the Zubulake approach, which considers various factors in determining what should be produced and who should bear costs. The court declined to shift costs, however, because the cost of production was not large in light of the amount in controversy. While the movant requested that the court compel the production of backup tapes, the court ordered that active e-mail stores be searched first to help assess the benefit of reaching backup tapes and that there would be no need to search backup tapes, absent a showing that additional relevant information was likely to be found.
In recent years, the court also has endorsed the use of "quick peek" discovery arrangements (discussed above) in some circumstances. It reasoned that such arrangements are the future of e-discovery because it is "impossible" to do a thorough document-by-document review for privilege prior to making a timely production of ESI. SLM Corp. v. J.C. Flowers II L.P., C.A. No. 3279-VCS (Del. Ch. Nov. 5, 2007) (Transcript). The court also entered an order affirming the use of a "quick peek" where the parties stipulated that a document-by-document review would "cause substantial delay and would be unduly burdensome" and where the parties agreed to use search terms to screen for privilege prior to production. See ACS Healthcare, LLC v. Wipro, Inc. and Wipro Ltd., C.A. No. 4385-VCP (July 23, 2009) (Order). This trend implies that—despite Delaware not having amended its Rules of Evidence comparable to those made to the federal rules—the judicially approved use of such arrangements would not waive the attorney-client privilege.
Conclusion
In contrast to the actions of other courts and jurisdictions, the Delaware Court of Chancery has not formally amended its Rules of Evidence to specifically address discovery in the digital age. The court's recent opinions, however, provide practitioners with significant guidance as to their expectations. The court has made it clear that despite the absence of any bright-line rules regarding ESI, the court continues to require that counsel act with a high degree of professionalism in dealing with e-discovery issues and, through the imposition of sanctions, has indicated a willingness to address discovery misconduct that results in spoliation. Further, the court has indicated a willingness to defer to parties' agreements regarding e-discovery, including practices aimed at reducing the costs of litigation. The result is that the Delaware Court of Chancery, through its ESI discovery rulings, has preserved its historically flexible, creative, and equitable approach to business litigation.