Did you know that your failure to retain all relevant materials after litigation is “reasonably anticipated” could result in you losing the lawsuit or being fined or sanctioned by the court? In fact, earlier this year, a New York federal judge awarded $2.68 million in discovery sanctions in a case valued at only $20,000.
Klipsch Group had sued DealExtreme (part of ePRO E-Commerce) for selling counterfeit Klipsch headphones. In discovery, ePRO turned over fewer than 500 documents, but during a deposition of ePRO’s CEO, Klipsch learned that ePRO had not imposed an adequate litigation hold on its electronic data and that it had failed to produce all relevant documents.
After ePRO hired a discovery vendor, an additional 40,000 documents were produced, including over a thousand sales documents that ePRO had claimed didn’t exist. The magistrate then allowed Klipsch to conduct a forensic examination of ePRO’s computer system.
This examination revealed that during the litigation hold period, ePRO had manually deleted more than 4,500 files (including emails), updated operating systems (which deleted program usage data) on numerous computers, and used data-wiping software, making some files unrecoverable. In addition, ePRO had failed to provide access to certain email and private messaging accounts.
The district court imposed numerous sanctions on ePRO, including ordering ePRO to pay Klipsch its reasonable costs and fees associated with ePRO’s discovery abuses. It determined those “reasonable costs and fees” to be $2.68 million.
Although estimated damages associated with the counterfeit goods were only about $20,000, the Second Circuit Court of Appeals upheld the district court’s sanctions, noting that “it was ePRO’s noncompliance with its legal obligations that occasioned the excessive costs in this case.”
Although ePRO had argued that sanctions should be proportional to the damages in the underlying dispute, the court stated that tying the sanction amount to the amount in controversy would restrict the court’s discretion and that injured parties should not be forced to suffer discovery abuses just because actual damages are low.
Instead, held the appellate court, sanctions should be tied to the costs incurred as a result of the misconduct. According to the court, the proportionality that matters 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.”
How can you protect yourself from such a large sanction? First, while there are some grey areas, the filing of a complaint unquestionably triggers the duty to preserve data (whether in tangible or electronic format), as does the receipt of a “preservation” notice or letter from the opposing party.
Some courts have held that the sending or receipt of a demand letter requires that materials be preserved. Even the occurrence of an event (such as a car accident, an on-the-job injury or a data breach) could trigger the need for a litigation hold.
To be prudent, any time you’re involved in a dispute, you should retain everything that you believe could be relevant to that dispute. This includes all documents, contracts, emails, voice mail messages, bills, photographs, text messages, instant messages, and the like.
If the dispute relates to you as an individual, it’s usually fairly simple to retain the relevant materials, but if your dispute involves your business, there are numerous steps that must be taken. First, you need to issue a written litigation hold notice, which should be sent to all personnel who might have relevant records, including IT personnel.
The “litigation hold” should advise employees to preserve all relevant materials and provide information that will help employees comply, such as the nature of the dispute and the relevant date range. You must then verify that all personnel are, in fact, implementing the hold.
Remember that, at least with respect to materials relevant to the dispute, destruction pursuant to your business’s document retention policy must be suspended. For example, if the policy provides that emails will be automatically deleted after 30 days, you’ll have to make arrangements to stop the automatic deletion.
Whether the dispute relates to you as an individual or to your business, you should also be sure to notify any third parties that might have relevant material, such as your accountant, to retain items relating to the dispute.
Please feel free to contact us if you have any questions about litigation holds or if you need help creating a document retention policy for your business.
