Welcome to Module 5-E.

A Duo of Sanctions Cases – Wells Fargo and Hobie Cat. This class discusses two more interesting sanction cases: Johnson v. Wells Fargo Home Mortgage, Inc., 2008 WL 2142219 (D. Nev. May 16, 2008); and R & R Sails, Inc., d/b/a Hobie Cat Co. v. Insurance Company of the State of Pennsylvania, 2008 WL 2232640 (S.D.Cal., April 18, 2008).

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Wells Fargo is Robbed of Staged Documents and Seeks the Death Penalty for the Lawsuit, But Gets an Adverse Inference Instruction Instead

In Reno, Nevada, Wells Fargo used e-discovery as a weapon to help defend against a disgruntled mortgagee. Johnson v. Wells Fargo Home Mortgage, Inc., 2008 WL 2142219 (D. Nev. May 16, 2008). Wells Fargo moved for dismissal as a sanction for intentional spoliation of computer evidence. Magistrate Judge Robert A. McQuaid, Jr. did not dismiss the case, but did order an adverse inference jury instruction that will probably be outcome determinative. The instruction requires the jury to assume that all of the information plaintiff deleted from his hard drives would have supported Wells Fargo’s defense.

I have never seen a defendant lose a case after being granted a key jury instruction like that, but still, the expense of going forward with trial can be considerable, and you never know what might happen. No doubt Wells Fargo was disappointed with the result, and, as I will explain, they have every right to be.

Facts of the Case

The plaintiff sued Wells Fargo alleging violation of the Fair Credit Reporting Act. Wells Fargo supposedly reported to credit agencies that two of plaintiff’s loans from Wells Fargo were in default, when they were not. Plaintiff also claims that Wells Fargo foreclosed on one of the loans, even though he was current in payment. Plaintiff claims that he “spent nine months making multiple phone calls and sending correspondence, including cancelled checks and loan documents, verifying the loans were current.” Id. at *1. Plaintiff attached some of the correspondence and other documents as exhibits to his complaint. Wells Fargo not only denied the complaint, it alleged that the plaintiff manufactured the evidence, that the whole thing was staged. According to Wells Fargo, the alleged communications never happened, and the documents were backdated frauds.

To prove its electronic document forgery defense, Wells Fargo, on July 28, 2007, asked plaintiff to produce for inspection the two laptop computers he used to write these documents. Wells Fargo hoped that a forensic exam would prove that plaintiff’s case was fabricated. It expected the forensic examination to show that the key documents supporting plaintiff’s case were prepared just before suit was filed and backdated to support his story of prior communications. Plaintiff objected to the request on September 14, 2007, stating that he would only produce specified files. Wells Fargo made several attempts to resolve the dispute, but ultimately was forced to file a motion to compel production of the hard drives on October 10, 2007. Id. at *3.

The motion was granted, and the plaintiff was ordered to produce the hard drives of his two laptop computers. When the drives were produced and examined by the computer forensic expert retained by Wells Fargo, he discovered that both drives had been “reformatted and/or reinstalled.” Id. at *1. The forensic exam showed that “Plaintiff deleted files and reformatted both hard drives on September 25, 2007 and October 5, 2007.” Id. at *3. That is two months after the request to produce. In other words, plaintiff secretly had his hard drives reformatted and reloaded while the parties were in negotiation over the production.

The expert said that the reformatting prevented him from retrieving useful information about the files that were on the disc before it was reloaded with new files. (This does not, however, mean that more information could not be gleaned by further study.) Still, among the new reloaded files the expert was able to find two of the letters that were key to plaintiff’s claim. The expert also found evidence to prove that these documents were created more than one year after plaintiff claims to have written them. In fact, consistent with Well Fargo’s suspicions, he found that they were created just a few weeks before suit was filed. It was not explained exactly what evidence the expert had to prove the back dating, but I suspect it was in the word documents’ internal metadata.

Wells Fargo also stated that it would be able to recover still more information from the hard drives, even though they had been formatted, if additional, more expensive forensic recovery work were performed. This would be possible because when a disc is reformatted, all of the original data remains on the disk and is not fully destroyed. Instead, the areas on the disk containing the data are merely marked as available. The old data stays there until overwritten with new files. Wells Fargo confidently predicted that additional forensic study would uncover more forged documents. However, they did not want to incur that additional expense. They wanted the case dismissed.

Naturally, Wells Fargo was upset by the inability to get at all but two of the documents which it claimed the plaintiff had forged and backdated. It had hoped the forensic evidence would be conclusive, and the case would promptly end with a summary judgment. Wells Fargo responded to this discovery of spoliation with a motion for sanctions, seeking the ultimate remedy of dismissal of plaintiff’s case. Here is Judge McQuaid’s summary of Well Fargo’s motion:

Defendant asserts that “Plaintiff has altered numbers on correspondence and checks, fabricated evidence to bolster his position, and most recently, erased his hard drives knowing the information on them was relevant to this action.” (Id.). Defendant goes on to assert that Plaintiff’s “despicable behavior was intended to hamper the fact gathering process by preventing Wells Fargo from obtaining highly relevant information that may have defeated his only remaining claim under the Fair Credit Reporting Act and his damage claims.” (Id.). Defendant contends an adverse jury instruction and monetary sanctions are not enough because the relevant documents no longer exist and that, instead, Plaintiff’s calculated and willful misconduct warrants dismissal of this action (Id.).

Plaintiff tried to justify his secret reformatting of the hard drives with a convenient story about his computers becoming infected with a virus. In these circumstances, that is about as convincing as the “dog ate my homework.” Here is the court’s summary of his excuse:

Plaintiff argues that his laptops were infected with computer viruses and spy-ware and that a computer technician diagnosed the problem and recommended wiping clean and reformatting each hard drive and then reinstall the operating systems (Doc. # 133 at 4). Plaintiff claims that before this procedure is performed, data on the hard drive is backed up and saved and then downloaded back onto the hard drive after the operating system is reinstalled (Doc. # 133 at 4). Thus, Plaintiff argues Defendant’s motion should be denied because no data has been destroyed (Id.).

One problem with plaintiff’s story, aside from the obvious that he did it in secret months after the request to produce, was that plaintiff refused or was unable to produce any of the back-up files of these computers. Further, there are the aggravating circumstance of the testimony of the plaintiff’s wife, and the affidavit that Well Fargo obtained from the technician the plaintiff hired to reformat the laptop. (Apparently the plaintiff himself has not yet been deposed.)

The deposition of plaintiff’s wife occurred just two weeks after the hard drives were formatted, yet in response to questions she denied that any work had been done to their computers. To make matters worse, the plaintiff’s technician who formatted his laptop stated that he only formatted one laptop. He said the other laptop was formatted by plaintiff’s wife two weeks later, with his help and instructions over the phone. Further, the plaintiff’s tech said that he never backed up the files on the laptop before the formatting, and did not instruct the wife on how to do so. Id. at *8. This certainly impeaches the deposition testimony of plaintiff’s wife, and shows that plaintiff was trying to hide his reformatting actions, apparently in the naive hope it would never be discovered. It also contradicts plaintiff’s claim that he backed up both computers before having them reformatted.

The fact that plaintiff had to hire an expert to format his laptops, and the expert had to talk the wife through the process, tells me that they are both computer novices. Formatting a disc is very easy to do, and is not something you normally need to take to a technician. You might retain a tech to try and get rid of viruses, but there is little evidence the plaintiff’s technician was ever even asked to try and fix the virus problem. Normally a tech could find several less drastic methods than reformatting to rid a disc of viruses and spyware.

Also, when you think about plaintiff’s virus story, you realize it makes little sense. Plaintiff said he copied all of the files onto backup discs, had the hard drive formatted, and then reloaded the files back onto the computer. How would that get rid of the viruses? The backup discs would include the infected files. When you restore the files onto the freshly formatted hard drive, the virus files would be restored too. You need to delete or quarantine viruses to get rid of them, not copy them back and forth. Alternatively, if you reformat, you do not reload the same files that were on the original infected disc, at least not until inspecting and cleaning all of these files to remove all of the malware.

The plaintiff here also showed his lack of expertise with computers when he tried to hide ESI by simply formatting the disk. More experienced users typically try to hide evidence by wiping a disc, not formatting it. This is easy to do with several off-the-shelf software programs. These other attempts to hide ESI by unscrupulous litigants, although more sophisticated, also ultimately failed. Even when better software does succeed to clear a disc of all incriminating ESI, there are still records left on the computer that these “Evidence Eliminator” type programs were run. Either way, you cannot win for trying, and there is almost always a way to catch a fraudster.

As to the two documents that Well Fargo’s expert found and claimed were backdated, plaintiff argued that this was pure speculation and “completely meaningless unless it is known whether the date and time set on the computer were correct when the documents were created.” Id. at *7. Again, that is a lame argument of a computer novice, to claim that the dating evidence is meaningless simply because a computer’s clock could have been changed. Why would it have been changed? Moreover, there are ways to detect computer clock resetting, as the CFO in Hawaiian Airline found out in In re Hawaiian Airlines, Inc., Debtor; Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., 2007 WL 3172642 (Bkrtcy. D. Hawai’i, Oct. 30, 2007). An employee who changed the date on his resume by changing the computer clock learned the same lesson in Plasse v. Tyco Elec. Corp., 2006 WL 2623441, (D.Ma. Sept. 7, 2006). In Plasse, the plaintiff’s case was dismissed for this attempted fraud on the court.

Motion For Sanctions

Wells Fargo’s motion for sanctions was based on both 2006 version of Rule 37 and the court’s inherent power. Judge McQuaid made short work of Rule 37 and held that it did not apply simply because plaintiff’s “conduct was not in violation of any discovery order governed by Rule 37.” That is a very narrow construction of the rule, and he did not try to explain or justify it, instead focusing on Well Fargo’s other grounds of the court’s inherent authority to impose sanctions. Judge McQuaid’s legal analysis was based on Ninth Circuit law in this area, primarily Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337, 348 (9th Cir. 1995). Anheuser-Busch requires courts to consider several factors “before imposing the harsh sanction of dismissal,” including whether the misconduct was intentional or in bad faith, whether there was a “relationship between the sanctioned party’s misconduct and the matters in controversy, such that the transgression threaten[s] to interfere with the rightful decision of the case,” and the effectiveness of “less severe alternatives than outright dismissal.” Id.

Plaintiff here conceded that the reformatting was intentional, but he denied this caused any evidence to be lost. Further, he claimed his actions were all done in good faith and so his case should not be dismissed.

Court’s Holding Denied Dismissal, But Imposed an Adverse Inference Instruction

The court disagreed with plaintiff’s stories and pleas of good faith, and instead held:

The timing of Plaintiff’s reformatting of his hard drives is also very suspect. Plaintiff reformatted both hard drives within a few days of each other, not only during the period of time he knew Defendant sought production of the hard drives, but also after Defendant informed Plaintiff, on September 20, 2007, that it intended to file a motion to compel production of the hard drives (Id.,Exh. 6). Within five (5) days of being notified that Defendant intended to file a motion to compel, Plaintiff reformatted his first hard drive (Id.,Exh. 1). Then within ten (10) days of reformatting his first hard drive, Plaintiff reformatted his second hard drive (Id.). During this entire period of time, Defendant sent numerous e-mails to Plaintiff attempting to settle the dispute over production of the hard drives (Id.).

Plaintiff’s explanation that he reformatted his hard drives because they were infected with viruses and spy-ware and then he downloaded all the files back onto the hard drives is of little help to the court in finding an absence of willfulness or bad faith. At no time did Plaintiff inform Defendant that his hard drives were infected with viruses or spy-ware, despite having knowledge Defendant requested production of said hard drives. And, as previously stated, Plaintiff has produced no evidence of any back-up files, nor has he indicated that he will produce any back-up files to show that he did, in fact, download all the files back onto the hard drives.

*5 Under these facts, the evidence weighs heavily against Plaintiff and tends to show Plaintiff did, in fact, willfully reformat his hard drives knowing Defendant was vehemently requesting production of those hard drives. Thus, this factor also weighs against Plaintiff.

So far, so good, for Well Fargo’s request to have the case dismissed because of spoliation. All of the factors the court considered as required by Anheuser-Busch weighed in defendant’s favor, except for the last one: whether alternatives less severe than dismissal might be appropriate. Here the court was inclined to give the plaintiff a break, and just order an adverse inference instruction instead of outright dismissal. As I stated before, although this means Well Fargo is almost certain to win, it will still be put to the great expense and burden of trial, and it is always possible a jury will rule for the plaintiff. Judge McQuaid must have had some unexpressed doubts about this case to let it go to trial like that. It is also possible he just wanted to play it safe and not risk reversal by the district court. It is hard to say without knowing more about this case and the personalities involved. In any event, here is Judge McQuaid’s explanation for his ruling:

Under these facts, it appears the evidence that Defendant’s forensic computer expert retrieved, together with the timing of Plaintiff’s conduct, actually lend support to Defendant’s theory of the case–that Plaintiff manufactured this action and the evidence he planned to use to support the action–rather than prevents Defendant from fully developing it’s theory as Defendant suggests. Accordingly, for the foregoing reasons, the court finds a jury instruction creating a presumption in favor of Defendant that the spoliated evidence was unfavorable to Plaintiff is a more appropriate, less drastic sanction.

Basically Judge McQuaid is saying that since the plaintiff’s fraudulent destruction of evidence confirms the defense position that the whole case is a fraud, that makes it more appropriate to allow the case to continue to trial, than be dismissed. I am not sure I understand that kind of “two wrongs make a right” logic. A plaintiff who manufactures a case out of whole cloth should not for that reason have carte blanche to commit more fraud. The court should have granted Wells Fargo’s motion and dismissed this case.

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Sanctions in the San Diego Hobie Cat Case Fall Short of the Tiger We Need to Keep Our Courts Fair

San Diego has long been famous in golf circles for having one of the best public golf courses in the country, Torrey Pines. This is where Tiger Woods won one of the most dramatic U. S. Open golf tournaments of all times. San Diego has also became famous in legal circles for the Qualcomm case. In Qualcomm, a plaintiff and many of its attorneys were, in a court room drama, caught playing “hide-the-ball” with 46,000 emails.

We Need More Tigers on the Bench
to Stop the Cycle of Discovery Abuses

Most commentators described the initial Qualcomm sanctions, like the high rough at Torrey Pines, as either suitably tough or too severe. My criticisms of the court’s decisions as too lenient were somewhat of a minority view. I do not think the punishment was proportionate to the enormity of the discovery misconduct, and have called the sanctions “wimpy.” A new opinion from the same federal court in San Diego seems to follow in the footsteps of Qualcomm and provides only a paper tiger response to e-discovery abuses. R & R Sails, Inc., d/b/a Hobie Cat Co. v. Insurance Company of the State of Pennsylvania, 2008 WL 2232640 (S.D.Cal., April 18, 2008).

Qualcomm was not, in my opinion at least, a case involving accidental omissions, miscommunications, or simple lawyer/IT mistakes. If it had been, my attitude towards the lenient treatment of the lawyers would be completely different. As I noted in my 100th Blog article on Victor Stanley, e-discovery is like golf. Perfection in both is impossible to achieve. Even Tiger Woods sometimes makes mistakes, and I’m talking about his golf course activities. Tiger made many mistakes at Torrey Pines tournament, including a double bogey on the first hole. He roared back from these mistakes, overcoming great pain in his left knee, and pulled off miracle shots when needed. He did so primarily because of his fierce warrior determination and uncompromising intensity.

If Qualcomm had just involved mistakes and errors in judgment, a lenient response would have been appropriate. But according to first opinions of the San Diego judges (although not the final opinion of Magistrate Judge Majors), Qualcomm intentionally hid-the-ball on a grand scale. They crashed well past the line between zealous representation and unethical practice. In a situation like that, involving a strong showing of bad faith, the sanctions should match the misconduct. The intensity of a professional athlete in the zone is called for. Proportionate and just consequences are the only way to send a credible message that fraud will not be tolerated in our courts. Harsh rhetoric alone will not suffice. That is why I thought the sanctions in Qualcomm were too weak.

The Hobie Cat case is again no tiger. Moreover, it seems to confirm my hypothesis that Qualcomm’s sanctions were not severe enough to deter hide-the-ball play, even in the same court. But see what you think. Consider the findings that Magistrate Judge Louisa S. Porter made in the Hobie Cat opinion. Then decide whether you think this defendant took the Qualcomm message seriously? Did they even hear it at all?

The Facts of R&R Sails, d/b/a Hobie Cat Co. v. Insurance Company of the State of Pennsylvania

The defendant in this case is an insurance company, and is thus a serial litigant. Insurance companies are routinely embroiled in litigation, and I know from long experience that they are frequently forced to defend frivolous claims and to respond to outrageous demands. This can sometimes lead to jaundiced behavior by claims examiners and attorneys. I make this observation not to excuse the actions in this case, but to explain how it can sometimes happen, even to the best of companies.

The plaintiff here, Hobie Cat Co., makes recreational and racing sailboats. A wildfire in Australia destroyed one of their manufacturing plants. This made it impossible for Hobie Cat to fulfill a contract to provide sixty catamarans for use in a racing event in April 2002. The insurer paid Hobie Cat for the loss of property, but would not pay for the loss of income, business interruption and other expenses. Suit was filed in San Diego state court in May 2007 and removed to federal court in June 2007. The suit alleged bad faith claims handling and also alleged that the laws of Australia should apply. (This choice of law argument was denied by the court in an earlier ruling.)

The insurer responded to the first request for production in August 2007 by producing paper documents, but did not include the adjuster’s computer notes. This information is key to most insurance disputes, especially ones that involve allegations of bad faith claim denial. The file usually documents all of the claim adjuster’s notes and analysis. It also logs all conversations concerning the claim, both in person and by phone. The key computer file is often called the claim activity log, and many insurers, including the defendant here, use an AEGIS type database software system for that purpose.

All insurers today keep such records, using some kind of software or another, and so the failure to include these notes was an obvious oversight. Here is how Judge Porter describes plaintiff’s counsel response to this non-production:

On September 7, 2007, Plaintiff sent a later to Defendant noting that “[c]onspicuously absent from [Defendant’s production of documents] are electronic or handwritten daily activity records/logs which are generally kept with an adjuster’s notes and telephone call records.” This letter was followed by another letter on September 10, 2007, in which Plaintiff’s counsel listed topics to be discussed at a requested meet-and-confer regarding discovery. This letter states: “we have not been provided with any electronic or handwritten daily activity records/logs which are generally kept with an adjuster’s notes and telephone call records.”

Hobie Cat at *1 (record citations omitted in this and subsequent quotes).

At this point, the activity log should have been produced, and this little game of hide-the-ball would only have drawn a smile and comment from Plaintiff’s counsel of “nice try, but I was not born yesterday.” However, defense counsel continued to insist that they had no activity logs to produce. Plaintiff’s counsel then did what they had to do. They asked the court for a hearing to resolve the dispute. Here again, defense counsel had another opportunity to “find” the file and produce it prior to a hearing before the judge. Most of the time, that is how this sort of situation plays out. Most counsel will not want to chance a referee’s review of a hide-the-ball play.

However, this defendant was apparently willing to take a chance. Counsel for defendant showed up at the hearing and continued to assert that the insurer did not keep activity logs, either in paper or electronic format. Judge Porter, an experienced magistrate who has no doubt heard thousands of insurance company disputes, did not believe the story. No modern insurance company investigates a claim without keeping a computer log of events. Here is how Judge Porter describes what happened at this hearing at *2:

At that time, Defendant’s counsel represented that a complete copy of Plaintiff’s claim file had been produced on August 30, 2007. Defendant’s counsel asserted at the conference that Defendant had responded to Plaintiff’s request for discovery and explained that no daily logs or telephone records had been produced to Plaintiff because no daily logs or telephone records were maintained by Defendant’s insurance adjusters. The Court expressed skepticism about counsel’s claim and ordered on November 29, 2007 that “Defendant shall either produce all daily activity logs or a verified declaration that Defendant is not in possession of daily activity logs.”

Here was yet another chance for the defendant to come clean, and find the “missing” logs before filing a sworn affidavit with the court. Instead, on December 14, 2007, the defendant filed an affidavit by their senior adjuster swearing that: “[t]here were no daily activity logs or telephone record logs that were created or maintained in connection with plaintiff’s claim.”

The defendant insurer should have anticipated that plaintiff’s next move would be to take the deposition of the affiant, the senior adjuster. That is exactly what happened. Then, at this point, the insurer claimed that it suddenly found the missing logs. This supposedly happened while defense counsel was interviewing the witness to prepare him for his deposition. Counsel provided no explanation as to why this revelation did not occur earlier, especially as this same witness must have been (or at least should have been) previously interviewed for his affidavit. The defendant printed out the computer notes, and then faxed eleven pages of log files to plaintiff’s counsel. However, due to unfortunate timing, no doubt completely accidental, the fax was not received by plaintiff’s counsel until after he was on a plane to New York en route to take the senior adjuster’s deposition.

Still, plaintiff’s counsel got the fax the night before the deposition, and asked the senior examiner some questions about it the next day, January 9, 2008. Now under oath and before a court reporter, the senior claims examiner, Blaise Lombardo:

[C]onceded on the record that his declaration dated December 14, 2007 was incorrect and that a claim log was maintained electronically by Defendant, separately from the paper-form claim file that had been produced to Plaintiff. Lombardo also represented that all documents responsive to Plaintiff’s discovery requests had since been produced.

Id. at *2. So apparently the “hide the ball” game was over; or was it?

After this admission, plaintiff’s counsel refused to conclude this deposition, and instead demanded more time to study the production, and readjurn the deposition another day to ask Lombardo more questions. Defense counsel refused, and plaintiff’s counsel was able to get an emergency hearing with Judge Porter by phone at the deposition in New York. Judge Porter of course agreed with plaintiff’s counsel:

Defendant opposes Plaintiff’s request to suspend the deposition on the ground that the deposition ought to be completed as scheduled because Plaintiff is now in possession of all the records necessary to depose Lombardo. . . . the deposition shall be adjourned and the remainder of [Lombardo’s] deposition shall be taken at a later date. Plaintiff’s counsel reserves a request for sanctions.

Here is where, in my view, things become really bizarre. Lombardo’s deposition was scheduled to continue on February 13, 2008. In addition, Lombardo’s supervisor, Joseph Chianese, who initially handled Plaintiff’s coverage claim before Lombardo took over, was scheduled to be deposed on February 12, 2008. Here is how Judge Porter describes the defendant’s version of what happened next:

On February 11, 2008, while preparing for Chianese’s deposition, Defendant’s counsel “realized for the first time that [he] had failed to produce six pages of the computer notes that Mr. Lombardo had provided to [him] in January.” According to counsel, “[u]nfortunately, in my rush to provide plaintiff’s counsel with the notes, I mistakenly faxed only eleven of the seventeen pages … I did not realize my error until I was back in New York for the deposition of Mr. Chianese in early February.”

Defendant’s counsel produced the remaining pages of claim log entries to Plaintiff’s counsel on February 12, 2008, the morning that Plaintiff was scheduled to depose Chianese. The additional six pages of log entries were all from the period of time when Chianese managed Plaintiff’s claim. The parties agreed immediately to continue Chianese’s deposition to a later date.

The following day, Plaintiff took Lombardo’s deposition for a second time. Lombardo testified that he had given all of the information that he printed out from Defendant’s electronic database to counsel in January. After questioning by Plaintiff’s counsel regarding Defendant’s database, whether data stored in the database could be altered, and whether all relevant data had in fact been produced, Lombardo’s deposition ended prematurely and was subsequently scheduled to be taken yet a third time.

Every time there is a deposition more documents are discovered, and produced at the last minute. I could understand this if we were talking about a database of thousands of documents, but here there were only eighteen pages. (One page was withheld for privilege, although the privilege log was apparently never served.) Not only that, but the deposition is adjourned for unexplained reasons when questions are asked as to whether any of the electronic files were modified before production, and whether still more files might exist. These questions are left unanswered by the opinion.

So what do you think? Were the sanctions in Qualcomm tough and scary enough to send a convincing message to would-be “hide the ball” litigants? I point out that all of the facts in Hobie Cat occurred after the Qualcomm revelations in August 2007.

The Parties Sanction Arguments in Hobie Cat

Of course, the plaintiff responded to these over-zealous defense games by moving for sanctions. Here is how the Court summarized plaintiff’s position at *3:

Plaintiff argues that sanctions are warranted in this case under Federal Rule of Civil Procedure 37, for violations of the Court’s order that Defendant produce claim logs if they existed, and for violations of Federal Rules of Civil Procedure 26(e) and 26(g). Plaintiff contends that production of the claim log was an especially important part of the discovery process because of the significance of the log to Plaintiff’s claim that Defendant exhibited bad faith in handling Plaintiff’s insurance claim. Plaintiff quotes the Advisory Committee Notes to the 1983 Amendment to Federal Rule of Civil Procedure 26(g), which state: “[i]f primary responsibility for conducting discovery is to continue to rest with the litigants, they must be obliged to act responsibly and avoid abuse.” Plaintiff argues that Defendant’s representations to Plaintiff and to the Court that a claim log responsive to Plaintiff’s discovery request did not exist, violated Rule 26(g) and represent at least a negligent failure by Defendant to locate, review and produce discovery.

Defendant responded that these were all just “honest mistakes” that were promptly remedied as soon as discovered. Here is the court’s summary of defendants explanation of the false affidavit at *4:

Though Defendant concedes that Lombardo’s signed declaration was incorrect in stating that the claim log did not exist, Defendant explains that Lombardo did not associate Plaintiff’s document request with the electronically-stored records which are maintained on his computer rather than in hard-copy, paper form. Defendant seeks to explain the incomplete production of the claim log, once identified, as another “inadvertent mistake” unworthy of sanctions.

Apparently this is the best explanation that they could come up with, that they did not think key records had to be produced because they were only stored on a computer, and had not been printed out. This kind of argument might have had some credibility ten years ago; but today? Also, remember the affidavit filed with the court said: “[t]here were no daily activity logs or telephone record logs that were created or maintained in connection with plaintiff’s claim.” Remember that this affidavit was filed at the judge’s request after the judge found it hard to believe that there were no computer logs. If you were the judge, how would you respond to all this? How should a judge respond to deter that kind of conduct by other litigants in the future?

Court’s Ruling in Hobie Cat

Here is what Judge Porter did. She starts off by chiding both sides for not solving their e-discovery problems at the initial 26(f) conference.

In 2006, Federal Rule of Civil Procedure 26(f) was amended “to direct the parties to discuss discovery of electronically stored information during their discovery-planning conference.” Advisory Committee Notes to 2006 Amendments. In this case, the parties’ discovery plan made no mention of possible sources of discovery and gives no indication that the parties discussed the discovery of electronically-stored information at their 26(f) conference.

Personally, under these facts, I do not see how a more complete 26(f) conference would have made any difference. The spirit of cooperation necessary to make these conferences effective was clearly never present in this case.

Next, the magistrate chided the plaintiff for not making a specific request for the electronic activity log files, and instead just asking for all “documents” related to the claim. I do not understand the point of those remarks. Judge Porter then recognizes that this error by plaintiff, if you can call it that, was corrected in the subsequent communications and conferences. After that, the defendant clearly knew that the plaintiff wanted to see the electronic log files, and not just the portions of the claim file that happen to be in paper.

Judge Porter then lays out the facts of defendant’s disingenuous denials, and piecemeal, last minute productions, and moves on to the governing law at *5:

Federal Rule of Civil Procedure 26(g) requires that every discovery response be signed by an attorney and the signature “certifies that to the best of the person’s knowledge, information, and belief formed after a reasonable inquiry” that the response is complete and correct. This rule is enforced by a mandatory sanction under Rule 26(g)(3), which reads:

If a certification violates this rule without substantial justification, the court, on motion or on its own, must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both. The sanction may include an order to pay the reasonable expenses, including attorney’s fees, caused by the violation.

Defendant’s production of electronically-stored claim log entries on January 8, 2008 demonstrate that Defendant had made incorrect certifications to Plaintiff as well as representations to the Court-that Defendant’s production of discovery was complete.

Judge Porter then makes short work of defendant’s attempt to dress up its actions as “honest mistakes.” Her writing on this is excellent, although it is of course written in a typical restrained judicial fashion:

Sanctions under Rule 26(g) must be issued unless violation of the rule was “substantially justified.” Defendant claims substantial justification for maintaining the position that no claim log was in Defendant’s possession, based on Lombardo’s misunderstanding of the discovery being requested of Defendant. According to Defendant, Lombardo failed to recognize that the AEGIS database that he entered notes into contained the “daily activity logs or telephone records” that Plaintiff had been requesting.

Lombardo has been an insurance adjuster for twenty-six years and explains that he did not associate the AEGIS database with the claim file that he maintains because “[t]he AEGIS computer system records are kept on a computer system that is separate from my file materials and I do not have a practice of printing them out to put in my file.”

Defendant argues that this “honest mistake” substantially justifies the incorrect certifications made to Plaintiff, as well as the false declaration provided to Plaintiff in response to this Court’s Order of November 29, 2007. However, to give meaning to the certifications provided on discovery responses, Rule 26(g) requires attorneys or parties to sign their responses “after a reasonable inquiry.” Evidence of such an inquiry prior to January 2007 may provide this Court with justification for the incorrect certifications provided to Plaintiff. Instead, this Court is presented with evidence that Lombardo was maintaining a claim log on his own computer using the AEGIS system while failing to recognize that this log was the same “record/log” being requested by Plaintiff. Lombardo entered notes of a communication with counsel into the AEGIS system on November 16, 2007, immediately prior to counsel’s representation to this Court that such a system was not possessed by Defendant and close in time to his signing a declaration that no such notes are maintained. The Court cannot find that a reasonable inquiry was made into whether Defendant possessed discovery responsive to Plaintiff’s requests, and therefore the Court does not find Defendant’s incorrect certifications to be substantially justified.

*6 Defendant is liable for sanctions, pursuant to Federal Rule of Civil Procedure 26(g), for making incorrect certifications to Plaintiff regarding discovery responses. Those certifications caused Plaintiff unwarranted attorney fees and costs.

The incorrect certifications were not only made to the Plaintiff, but also to the Court. A false affidavit was filed with the court. Yet Judge Porter does not include this as a basis for sanctions. What kind of message does this send?

Next, the opinion explains that sanctions are also appropriate under Rule 37(c) for failure to timely supplement initial disclosures. Here is how the defendant violated this rule:

Once Plaintiff established, at Lombardo’s January 9, 2008 deposition, that Defendant’s earlier certifications and Lombardo’s declaration regarding Defendant’s discovery responses were incorrect, the parties jointly contacted the Court. At that time, Defendant represented that Plaintiff was in possession of the entire claim log which Plaintiff had earlier requested. However, one month later, when Plaintiff’s counsel traveled again to continue the deposition of Lombardo and also to depose former insurance adjuster Joseph Chianese, Defendant produced additional portions of the claim log. Lombardo declares that he printed all pages of the claim log maintained in the AEGIS system prior to his deposition scheduled for January 9, 2008. Defendant’s production of additional claim log entries on February 12, 2008 demonstrate that Defendant did not complete the disclosure of the claim log in a timely manner.

Then the court concludes by determining what sanctions are appropriate for this type of conduct. As every lawyer who has ever moved for sanctions knows, this is the part of the order that you really care about. The statement of facts and law are interesting, but the sanctions are what count. If an order is filled with tough talk, but not tough sanctions, like Qualcomm, it is just a barking dog with no bite. You can ignore it and carry on.

Plaintiff sought sanctions of $67,154.72 to fully compensate it for the fees and costs it incurred because of defendant’s hide-the-ball tactics. They did not get it. Instead, the judge cut the award down to $39,914.68, and made the sanction payable by both defendant and its legal counsel:

IT IS HEREBY ORDERED that Defendant and Defendant’s counsel are jointly and severally liable for attorneys’ fees and costs caused by the failure to search for and timely produce electronically-stored information. Defendant and Defendant’s counsel shall pay Plaintiff, in care of Plaintiff’s counsel, the amount of $39,914.68, within thirty (30) days of the date of this order. These monetary sanctions are SO ORDERED by this Court and are not made on a report and recommendation basis.

Plaintiff also sought non-monetary sanctions, primarily preclusion of defendants use of any evidence that it has not already produced. This seems like a pretty mild request to me. I cannot understand why plaintiff did not ask for much more, such as striking defenses or total preclusion of the claims files. Of course this slap on the wrist was granted:

*9 Based on Defendant’s past failure to timely produce electronically-stored information, and Plaintiff’s concern that additional responsive electronically-stored information may be in Defendant’s possession, the Court finds it necessary to recommend non-monetary sanctions “aimed at resolving the compliance issue and restoring some confidence in the discovery process.” Board of Regents of the University of Nebraska v. BASF Corp., 2007 U.S. Dist. LEXIS 82492 (D.Neb., Nov. 5, 2007) (ordering sanctions where responsive documents were produced one day before the deposition of a key witness but without evidence of a willful failure to produce).

The Judiciary Must Act Forcefully to Restore Confidence in the Discovery Process

In my view, Hobie Cat, like Qualcomm, is more bark than bite. This kind of mild judicial response will not restrain future hide-the-ball tactics. For many litigants it is business as usual. Words alone are not enough for an effective wake up call. This is one reason I predict we will see more cases like this in San Diego, and other courts, in the coming months. (We did!)

Litigants and attorneys are to blame for this, but so is the judiciary. The bench underestimates the temptation of parties to hide-the-ball, and overestimates the chilling effect of harsh rhetoric. Many litigants and lawyers are by no means boy scouts. It is naive to treat them as such. We need stronger responses by the judiciary to resolve the compliance issues and restore confidence in the discovery process. Only strong sanctions will stop this cycle of abuse. We need more Tigers on the bench. Tigers that are willing to roar and bite in the face of bad faith.

______________________

SUPPLEMENTAL READING: Sanctions cases are common. Find a read several opinions in this area dated 2016 and later that discuss the December 2015 revised version of Rule 37(e). Do you see any fundamental differences when the analysis includes the latest revised rule?

EXERCISE: Think about sanctions and consider why judges might be reluctant to impose penalties on parties, and especially on attorneys, for failures in electronic discovery. Here are a few things to consider to help in your investigation and analysis, but this is by no means exhaustive. State court judges are usually elected, but district court judges are appointed for life. Are the U.S. magistrates? What impact might this have? What about the human factor of personalities? What other factors might come into play? Have you heard the one about the importance of knowing what your judge had to eat for breakfast that morning? How do you exploit these conditions to fight against sanctions? How do you overcome them to get sanctions imposed on the other side?

Students are invited to leave a public comment below. Insights that might help other students are especially welcome. Let’s collaborate!

Copyright Ralph Losey 2015

 

Ralph Losey is a practicing attorney who specializes in electronic discovery law. He is a principal in a U.S. law firm with over 50 offices & 800 lawyers where he supervises electronic discovery work and litigation support. Ralph has written over two million words on law and technology, including six books on electronic discovery. His latest books are "E-Discovery for Everyone" (ABA 2017) and "Perspectives on Predictive Coding" (ABA 2017) (ed. & contributor). His blog is widely read in the industry: "e-DiscoveryTeam.com." Ralph is the founder and principal author of "Electronic Discovery Best Practices" and "e-Discovery Team Training," a free online course covering all aspects of e-discovery. Ralph's sub-speciality is the search and review of electronic evidence using multimodal methods, including artificial intelligence. He also has a free online training program to teach these advanced methods - the "TAR Course." Ralph has devoted a month of his time each year since 2013 to research and test various AI-enhanced document review methods. In 2015 and 2016 Ralph and his Team participated in the TREC Total Recall Track experiments sponsored by the National Institute of Standards and Technology. Ralph has been involved with computers and the law since 1978. His full biography is found at RalphLosey.com. Ralph is the proud father of two children, Eva M. Losey and Adam Colby Losey, a high-tech lawyer married to another e-discovery lawyer, Cat Jackson Losey, and, best of all, Ralph has been married since 1973 to Molly Friedman Losey, a mental health counselor and life-long friend.

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