August 29, 2011 Articles

Delaware Upholds Sanctions for Electronic Discovery Violation

The Delaware Supreme Court affirmed an award of sanctions against a litigant who authorized the deletion of unallocated free space on a computer hard drive

by C. Malcolm Cochran and Travis S. Hunter

Delaware courts are focusing more attention on electronic discovery disputes. In Genger v. TR Investors, LLC, ___ A.3d ___, No. 592, 2010, slip op. (Del. July 18, 2011), the Delaware Supreme Court affirmed a substantial award of sanctions against a litigant who was found to have authorized the "wiping" of "unallocated free space" on a computer hard drive in violation of a status quo order. Sanctions affirmed by the court included raising the burden of proof for the responsible party "by one level" to "clear and convincing evidence," refusing to accept the offending party's "uncorroborated testimony" as "sufficient to establish any material fact," and fees and costs relating to the investigation and litigation of the charge of spoliation, totaling $3.95 million. Id. at 12–13. The court's opinion also discusses technological issues frequently faced by practitioners when addressing the duty to preserve.

Genger arose in the context of litigation over a contested election of directors under section 225 of the Delaware General Corporation Law. The parties agreed upon a "status quo" order that prohibited the destruction of certain electronically stored documents and materials. The case was thereafter settled, and new board members were installed. Once the reconstituted board took control, it was determined that an individual defendant had authorized an employee to use SecureClean software set on "Deep-Clean" mode to "wipe" unallocated free space on the defendant's hard drive shortly after company lawyers and a consultant had collected documents from the "allocated" space.

The Court of Chancery concluded that the "wiping" was intended to destroy material documents that would likely have resided in the unallocated free space and was thus a violation of both the duty to preserve and the status quo order. TR Investors, LLC v. Genger, 2009 WL 4696062 (Del. Ch. Dec. 9, 2009). The settlement was set aside, the case was reopened, and, among other relief, sanctions were entered against the party found to have authorized the e-document destruction.

The opinion of the Delaware Supreme Court affirming the findings of, and sanctions for, spoliation and contempt is notable in several respects. First, in a lengthy footnote, the court explained the importance of "unallocated free space" on a computer hard drive in the context of the duty to preserve. As described by the court, documents remain in the unallocated space even after being deleted by the user until new files are written over them in the same space. Slip op. at 19 n.39.

The trial court opinion explained in more detail the significance and functionality of unallocated space, saying that a "temporary copy" of a document is made in the unallocated free space on a hard drive each time the document is opened, so long as it remains open long enough to be saved by the computer's auto-save feature. TR Investors, LLC, 2009 WL 4696062, at *6–7. The temporary copy will remain, apart from the "active copy," in the unallocated free space until it is overwritten, regardless of what happens to the active copy.

The Delaware Supreme Court observed nonetheless that the preservation of unallocated free space is not automatically required, absent the existence of a duty to preserve:

We do not read the Court of Chancery's Spoliation Opinion to hold that as a matter of routine document-retention procedures, a computer hard drive's unallocated free space must always be preserved. The trial court rested its spoliation and contempt findings on more specific and narrow factual grounds—that Genger, despite knowing that he had a duty to preserve documents, intentionally took affirmative actions to destroy several relevant documents on his work computer.

Id. at 20.

In dicta, the court then addressed the impact of the level of culpability—whether the outcome might have been different had the conduct not been intentional. The court thus observed that it was "noteworthy" that there was no proof that "the use of the SecureClean program fell within [the company's] ordinary and routine data retention and deletion procedures," id. at 22–23, and that "the outcome might perhaps [have been] different if [the company] had a data retention policy whereby SecureClean was run . . . every three months" and was scheduled to run at the time in question. Id. at 23 n.49. Focusing further on the distinction between intentional and inadvertent data destruction, the court suggested that Delaware may differ from jurisdictions where the "destruction of evidence due to routine document destruction policies warrants sanctions such as an adverse inference instruction." Id.

The court also suggested that to avoid future repetitions of the "unallocated free space issue," litigants "and the trial court [should] address unallocated free space issues at the outset of litigation, prior to the implementation of a document preservation order," and that the "court-ordered discovery of electronically-stored information should be limited to what is reasonably accessible," which must be determined "on a case-by-case basis." Id. at 23–24.

Then, in a broad hint on the subject of what is "reasonable," the court cited both Rimkus Consulting. Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 612 (S.D. Tex. 2010), which analyzes the "duty to preserve by focusing on proportionality and reasonableness," and Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 216–18 (S.D.N.Y. 2003), for the proposition "that a corporation does not have a duty to preserve 'every' data source, because such a rule would 'cripple large corporations . . . [that] are almost always involved in litigation." Id. at 24 n.50 (quoting Zubulake, 220 F.R.D. at 216-218).

The Delaware Supreme Court's opinion in Genger thus serves as a guide to practitioners grappling with electronic discovery obligations as applied by the Delaware courts. While the law is still developing in Delaware, Genger sets several guideposts. The preservation of electronically stored information is not automatically required, absent the existence of a duty to preserve. The intentional destruction of material evidence in the face of a duty to preserve will be met with harsh treatment in Delaware. What and how much to preserve should be addressed on a case-by-case basis, based on what is "reasonably accessible." What is "reasonably accessible" may be a matter of "proportionality." In turn, as observed in Rimkus Consult. Grp., 688 F. Supp. 2d at 613, proportionality "depends heavily on the facts and circumstances of each case and cannot be reduced to a generalized checklist of what is acceptable or unacceptable." This "facts and circumstances" test should include a balancing of the need for the discovery with the burdens imposed, the amount in controversy and the nature of the case.

Finally, Genger emphasizes the importance of early communication and agreement among counsel and, where appropriate, the court regarding the scope of e-discovery, including the need to preserve less-well-known categories of e-data, such as "unallocated free space." In this regard, the trial court's reliance in Genger on e-discovery experts, including an independent e-discovery consultant, reflects the importance of involving experienced consultants at an early stage in this highly technical, and often risky, area.

Keywords: litigation, commercial, business, Delaware, sanctions, electronic discovery

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