On Appeal, KPMG Ordered to Continue Preservation of more than 2500 Hard Drives

Pippins v. KPMG LLP, —F.R.D.—, 2012 WL 370321 (S.D.N.Y. Feb. 3, 2012)

In this opinion, the District Court found the Magistrate Judge’s order requiring defendant’s preservation of more than 2500 hard drives was not clearly erroneous or contrary to law.  Finding objections to the order moot, however, because plaintiffs’ motion for conditional certification of a nationwide class was granted, the court denied defendant’s motion for a protective order and ordered preservation of the hard drives until the parties could agree on a sampling methodology, until defendant abandoned a particular litigation position, or until members of each relevant class were established.

In this case, plaintiffs—former and departing Audit Associates at KPMG—filed an action under the Fair Labor Standards Act (“FLSA”) and New York Labor laws and sought conditional certification of a collective action under the FLSA.  In a prior opinion discussed here, a Magistrate Judge denied KPMG’s motion for a protective order and ordered ongoing preservation of more than 2500 hard drives during the pendency of plaintiffs’ motion to certify.  Two prominent factors in that decision were the potential for all Audit Associates to become plaintiffs either as part of a class or individually and the inability of the court to determine the potential relevance or value of the contents of the at-issue hard drives because of KPMG’s refusal to provide any information regarding the same.  On appeal, KPMG asked the District Court to set aside that order and to grant a protective order to limit the scope of its preservation obligation.

Summarizing broadly, the District Court concluded that the Magistrate Judge’s order was not clearly erroneous or contrary to law but rather was “perfectly sensible” because it was not permanent, because the contents of the hard drives were unknown, and because it was then unclear whether the potential class would be certified or whether individual plaintiffs would have to proceed alone.  The District Court further found, however, that objections to that order were moot because class certification had been granted and indicated it would decide whether a protective order was warranted.

Upon examination of the issues, the District Court denied KPMG’s motion for a protective order and ordered ongoing preservation of the at-issue hard drives.  In so deciding, the court first determined that the hard drives were likely to contain relevant evidence, including when the Audit Associates were at work and what they did while there.  Noting that it could nonetheless grant a protective order if it concluded that the burden of preservation outweighed the benefit, the court turned its analysis to the principle of proportionality and its applicability in this scenario.

Notably, the District Court’s analysis was clear in its conclusion that “proportionality is necessarily a factor in determining a party’s preservation obligations” but nonetheless echoed prior courts’ cautionary language recognizing the “amorphous” nature of the principle.  As to the present case, the District Court determined that, like the Magistrate Judge, it could not conclude that the costs of preservation outweighed the benefit because there was insufficient information to conduct such an analysis.  Put another way, because of KPMG’s refusal to provide a sample of the drives’ contents to ascertain the “benefit” of preservation, no balancing analysis could be performed.  “In short,” the court concluded, “KPMG is hoist on its own petard.”

The court also concluded that “at this point in the litigation, all Audit Associates during the relevant time period qualify as key players.”  A “key player” is someone likely to have discoverable information relevant to the claims or defenses of any party.  Moreover, according to the court, “[a]ll parties are by definition ‘key players.’”  “Under Zubulake, the duty to preserve all relevant information for ‘key players’ is triggered when a party ‘reasonably anticipates litigation.’”  In the present case, the court reasoned, KPMG should “reasonably anticipate” that any Audit Associate working during the relevant time period is “a potential plaintiff in this action” or (speaking specifically of the potential NY class) “a foreseeable claimant.”

Addressing the question of when the duty to preserve might end, the court ordered that preservation must continue until the parties agree upon a sampling methodology or until KPMG formally “abandons its litigation position that, even if Audit Associates generally are found to be non-exempt employees (an issue yet to be resolved), individual Audit Associates perform work that renders them exempt from the FLSA.”  If neither occurs before the opt-in period expires, KPMG may then destroy all hard drives of those who failed to opt-in (to the FLSA class) EXCEPT those belonging to former associates with the potential to belong to the NY class.  Those hard drives are subject to preservation until resolution of the state class issue, namely will the class be certified and, if so, who will it include.