Scorched Earth Litigation Tactics

As a frequent ERISA litigator, I am embarrassed to report the latest e-discovery nightmare comes from that field.  Wachtel v. Health Net, Inc.,2006 WL 3538935, LEXIS 88563, (D.N.J. Dec. 6, 2006).  This class action alleges breach of fiduciary duty by improper handling of health claims.  But at this point, after five years of litigation, the merits of the case have been completely over shadowed by the improper defense tactics.  The District Court Judge begins her 44-page opinion by observing that the case “gives new meaning to the term ’scorched earth’ litigation tactics.”

The opinion details just about every e-discovery violation possible, including multiple misrepresentations to the court, and reads like a handbook on what not to do, including my two personal favorites:

(7) failing to disclose to this court or to the Magistrate Judge during three years of discovery that e-mails older than 90 days were never searched . . . .

10) keeping even their own outside counsel (other than the Epstein Becker firm) unaware of their e-mail procedures that resulted in widespread dereliction of their discovery obligations.

At page thirty-three of the opinion, the Judge returns to the scorched earth analogy:

Defendants’ strategy has been a concerted war to waste huge time and resources of Plaintiffs in pursuing this litigation. It gives “scorched earth litigation” a new standard of brashness. Defendants have also forced the Court to devote years to police discovery abuses over and over again. Defendants continue to ignore the Court’s rulings over and over again. Defendants’
persistent pattern of delay, defiance of Court Orders, evasive responses to Plaintiffs’ discovery requests, and lack of candor have resulted in crushing prejudice to Plaintiffs in the form of forgetful witnesses and extraordinary expenditures of time, effort, and money. The wanton waste of judicial resources caused by Health Net, as exemplified herein, is equally staggering

Not surprisingly, the opinion concluded by imposing severe sanctions: deeming various facts as established, striking “surprise” trial exhibits, barring defendants’ use of late-designated witnesses, ordering reimbursement of plaintiffs’ attorney fees and costs, appointing a discovery master to be paid for by defendants, and imposing a fine in an amount to be determined.  The court did not enter the ultimate sanction of a default judgment against all defendants, but reserved ruling on that pending resolution of all class action issues. The Court also reserved ruling on whether sanctions should also be imposed on defendants’ latest outside legal counsel, the fourth in a series of attorneys and firms to represent them.

Louis Vuitton Sanctioned for Sand-Bagging

An adverse inference and fees sanction was entered against the plaintiff, Louis Vuitton (”LV”), in Louis Vuitton Malletier v. Dooney & Bourke, Inc., 2006 U.S. Dist. LEXIS 87096 (S.D.N.Y. Nov. 30, 2006). LV, the well known maker of expensive leather bags and accessories, is supposedly the most counterfeited brand in fashion history.  It is no wonder they often sue for trademark infringement.  

They may still win this case, but they are off to a very shaky start.  The magistrate’s 50 page order sanctioned LV for misleading the court about e-discovery.  The Court also disapproved of LV’s refusal to use outside experts to help LV’s IT personnel extract emails from its computer database. 

In the words of Magistrate Dolinger, who seems quite upset:

There is no question that LV has failed to comply with its discovery obligations, misled its adversary and the court, and flouted a court order.  . . .  That application triggered a representation by LV that it had undertaken an appropriate search for customer communications about S-lock products and had no such communications. It is evident that this representation was false, and in the absence of any explanation by LV for this misstatement, we have no reason to infer that it was other than knowingly false.

So once again we see a party burned for saying it searched and had no emails, when later events show this to be false. Nothing new here. But the Court’s criticism of LV’s reliance solely on its IT department is unusual and no doubt will be heavily cited by vendors in the future. 

The affidavit by LV’s IT employee swore to the difficulties they had in searching the emails maintained in their Kana Oracle database.  In footnote 10, the reason alleged for this difficulty was, in the words of LV’s IT employee, that:

the e-mails are stored in a raw format which includes both HTML-formatted e-mails as well as e-mails with foreign-language encoding

CV went on to argue that they would have had to hire experts in both Oracle and Lotus Notes to properly search and extract the emails.  The ironic footnote 10 recounts how LV considered the $15,000 price tag for those expert services to be too expensive, and so they tried to do it themselves.  As you might imagine, the work they did was deficient in the magistrate’s view, not to mention late.  Ultimately LV was hammered with an adverse inference, and ordered to pay the defendant’s reasonable fees, which, it is safe to assume, will make the $15,000 quote seem cheap.

E-Mails Woes Hit Morgan Stanley Again

The defendant brokerage firm in the landmark 1.45 billion dollar Coleman case is under attack again, this time by NASD (”National Association of Securities Dealers”), the private organization which regulates it dealer members. Morgan Stanley is accused of misrepresentations concerning the loss of all of its e-mail in the destruction of the World Trade Center on 9/11/2001.  Upon request, NASD provided me with a full copy of the disciplinary Complaint No. 2005001449202.

I am defense oriented by nature and so I think it should be stressed that these are mere allegations, not adjudicated facts.  The disciplinary complaint itself begins with this disclaimer:

The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD Regulation in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, you may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.

The first three paragraphs of the complaint summarize the allegations as follows:

1. For a three-and-a-half year period, from October 2001 through at least March 2005, respondent Morgan Stanley DW, Inc. (MSDW) routinely failed to provide e-mails to arbitration claimants and regulators in response to discovery obligations and regulatory inquiries. After the firm’s e-mail servers in New York City were destroyed on September 11, 2001, the firm restored millions of e-mails by using back-up tapes. Many other e-mails, moved from servers onto individual users’ computers, were not affected by the events of September 11. Nevertheless, MSDW routinely failed to provide pre-September 11, 2001 e-mail in numerous customer arbitration proceedings and in response to regulatory inquiries, falsely claiming that its pre-September 11, 2001 e-mail had been destroyed.

2. In addition to failing to produce e-mail in numerous arbitrations and regulatory matters, and falsely stating that such e-mail had been destroyed, MSDW later destroyed many of the same e-mails. Instead of preserving the e-mail back-up tapes that had been used to restore its servers, MSDW put those tapes back into use, overwriting and permanently erasing their contents. The firm also allowed the e-mails that had been restored to the firm’s servers to be permanently deleted by users of the firm’s e-mail system over an extended period of time. As a result, between September 2001 and March 2005, millions of pre-September 11, 2001 e-mails that had been available to the firm were lost.

3. By virtue of the conduct set forth herein, MSDW violated NASD rules by failing to comply with its obligations to produce documents both to claimants in discovery in arbitration proceedings and to regulators, and by falsely representing that documents in its possession did not exist. MSDW also violated the recordkeeping requirements of the federal securities laws and NASD rules by erasing millions of those same documents. MSDW also failed to establish and maintain systems and written procedures to supervise the activities of its employees and the types of business in which it engages, which were reasonably designed to ensure compliance with the recordkeeping requirements and with its obligations to respond completely and truthfully to regulatory requests and to discovery requests in arbitration proceedings.

The disciplinary complaint purports to state three causes of action.  Count One alleges violations of NASD Conduct Rule 2110, Procedural Rule 8210, and IM-10100 under the Code of Arbitration Procedure. The violations are based on allegations that Morgan Stanley provided false information and failed to produce emails in response to requests from claimants and regulators. 

Count Two alleges violation of section 17(a) of the Securities Exchange Act of 1934, Rule 17a-4 thereunder, and NASD Conduct Rules 2110 and 3110. The violations are based on alleged failures to preserve required books and records, namely e-mails.

Count Three alleges violations of Conduct Rules 2110 and 3010(a) and (b). The violations are based on allegations that Morgan Stanley failed to establish and maintain systems and written procedures reasonably designed to preserve required records and to ensure that Morgan Stanley conducted adequate searches in response to regulatory inquiries and discovery requests for e-mail.

POSTSCRIPT: September 27, 2007.  The NASD announced a settlement with Morgan Stanley today wherein the disciplinary action was resolved for $12,500,000, with no admission of wrongdoing.  As part of the settlement a $9.5 million fund will be established to pay certain arbitration claimants.  According to news reports another $3 Million will be paid to NASD as a fine. Further, Morgan Stanley will be required to retain an independent consultant acceptable to NASD to review the firm’s procedures for complying with e-discovery requirements in arbitration proceedings relating to its retail brokerage operations.  The NASD has, by the way, changed its name since this proceeding was commenced, and is now called FINRA, which stands for the Financial Industry Regulatory Authority.

Judge Shira A. Scheindlin Video on the New Rules is now Online

A video has recently been posted online of a speech by Judge Scheindlin of Zubulake fame. She gave the keynote address on October 23, 2006, at the annual meeting of ARMA  (formerly known as the Association of Records Managers and Administrators).   Although it is unlikely to be a hit on YouTube, it is certainly worth watching.

Judge Scheindlin’s speech is on the new rules.  She begins with the standard explanation from the commentary on why the new rules were needed:

1. volume of e-records, much more than paper records;

2. e-storage systems are dynamic; created and destroyed automatically;

3. ESI is difficult, but not impossible to delete (you only transfer information from an accessible location to inaccessible location);

4. ESI has to be  retrieved, restored and translated before it can even be reviewed.

Judge Scheindlin then talks about the “meet and confer” Rules 26 and 16, pointing out  that the revision to Rule 26 requiring the parties to  discuss “any issues relating to preserving discoverable information” is the first time the Federal Rules have ever mentioned the word ”preservation”. 

She then turns to Rule 26(b)(5)(B) on return of privileged materials, pointing out how that the Advisory Committee on the Rules of Evidence has proposed a new Evidence Rule 502.  It would provide the procedural rule with much needed teeth by prohibiting a finding of waiver if reasonable precautions to review were taken.

Then Judge Scheindlin goes into Rule 26(b)(2)(B) on inaccessibility, and Rule 37(f) on “safe harbor” destruction. No new comments on either rule, instead she just outlines the text of the rules and commentaries.  

You can also download a copy of the full text of her speech.