Court Declines to Shift Costs of Production of E-mail from Backup Tapes, Citing Defendants’ Non-Compliant and Deceptive Discovery Tactics and Disregard of Court Orders

Wachtel v. Guardian Life Ins. Co., 2006 WL 1286189 (D.N.J. May 8, 2006) (Unpublished)

In this opinion, the court addressed plaintiff’s motion to compel production of certain materials being withheld by defendants on a claim of privilege. It also denied defendants’ appeals of earlier discovery orders issued by the magistrate which imposed an adverse inference sanction for spoliation of evidence and required defendants to produce from backup tapes the e-mail of some 59 individuals.

In Camera Review of Privileged Documents

The court found sufficient facts to support a prima facie showing that in camera review of materials withheld by defendants on privilege grounds may reveal evidence establishing that the crime-fraud exception should apply. Among other grounds, the court found that defendants may have used their counsel to delay discovery and avoid their preservation and production obligations. Throughout discovery, plaintiffs had expressed concerns to the magistrate that defendants were not taking all appropriate steps to preserve and produce relevant evidence. In response to these concerns, Health Net’s counsel stated in a letter to the magistrate that “we are familiar with our obligations” and that the company “has complied with its obligations to preserve evidence.” Despite these assurances, the court found there was a prima facie showing that Health Net did not have effective procedures in place to ensure the preservation of employees’ electronic mail. Although prior discovery orders should have unearthed hundreds or perhaps thousands of e-mails from defendants’ files during the three-year discovery period, it was not until late 2005, when the court commenced its “Rule 37/Integrity Hearing” into alleged discovery abuses and misrepresentations to the court, that most of those e-mails first began to emerge, years after they should have been produced in discovery.

For the duration of years of discovery, and even throughout the Integrity Hearing itself, Health Net counsel did not disclose what this Court and Magistrate Judge Shwartz learned for the first time after the Integrity Hearing – that Health Net e-mails were sent to backup disks after 90 days from the date of creation; that these disks were never searched for responsive documents during the three year period of discovery; and that when any employees deleted e-mails within 30 days, such e-mails would be lost permanently upon transfer to storage at 90 days. Moreover, even when a central witness in the case (Eileen O’Donnell, Esq.) retained e-mails by overriding this system, Health Net counsel gave conflicting accounts of whether she was asked to do a search of those e-mails for relevant documents. Ms. O’Donnell testified that she was never asked to do and she never did a comprehensive e-mail search. Outside counsel testified that Ms. O’Donnell claimed she turned over all the e-mails that existed on the “HIAA issue,” which consisted of a few e-mails between Ms. O’Donnell and Lee Barry. Inside counsel testified Ms. O’Donnell was aware of the document requests in this case and aware of the need to look through her e-mail files to produce all responsive e-mails, so to the extent that she elected not to search her own e-mails, inside counsel did not get those e-mails from Ms. O’Donnell. Three counsel; three statements; no serious e-mail search.

Despite repeated queries by this Court as to why so many highly relevant e-mails had never been timely produced, not one member of Health Net’s legal team informed the court about the non-preservation risk and non-search of e-mails older than 90 days until after the conclusion of the Rule 37/Integrity hearing. By this time, it was too late to query Health Net witnesses about their searches for documents. Health Net’s newest outside counsel, Morgan Lewis and Bockius, submitted a lengthy certification on December 12, 2005, in response to the Court’s questions about whether, when and how certain specified Health Net employees made a reasonable, thorough and diligent search of their files for responsive documents. The December 12, 2005 certification did not state that HNNE employees’ e-mails went to a backup tape after 90 days, and thus could not be searched by the employees themselves, nor that the backup tapes were not searched by Health Net. Counsel at Morgan, Lewis and Bockius LLP stated that he also did not know of this Health Net electronic document policy, but Health Net’s other outside counsel at Epstein Becker & Green P.C., Herve Gouraige, Esq., did know about the extent of email searches or lack thereof.

In sum, Health Net disclosed to one of three outside firms (Epstein Becker and Green, P.C.) its e-mail policies; no counsel informed either Magistrate Judge Shwartz or this Court until after the conclusion of the Rule 37/Integrity hearing; and Health Net only searched four of its scores of pertinent employees’ backup tapes, for limited periods of time, in order to locate responsive e-mails. The most relevant e-mails in the case were produced from a one-month search of backup tapes belonging to a single employee, which were searched only after the Court at the Integrity Hearing demanded to know the origin of a specific document.

The court concluded that these facts, and others, were sufficient to support a prima facie showing that in camera review of the materials may reveal evidence to establish that the crime-fraud exception applies to certain documents. The court directed plaintiffs to identify which documents they sought to be produced under the crime-fraud exception, and advised that the in camera review would be conducted by either a magistrate judge or a special master, depending on the volume of documents submitted for review.

Enforcement of Prior Discovery Orders

The court ordered defendants to produce the email of the 18 persons identified in the court’s February 28, 2006 Order no later than June 1, 2006. It also affirmed the magistrate judge’s March 9, 2006 Order, which ordered the defendants to produce “all emails, including those located in the backup email system/archived emails, that are responsive to the discovery demands served in this case.” The court rejected defendants’ argument that the March 9 order did not reflect a balancing of the factors set forth in Rule 26, and was overly burdensome:

There is no evidence to suggest that the discovery ordered in the March 9th Order is cumulative or duplicative of the discovery already produced in this case. On the contrary, one of the reasons Judge Shwartz ordered Defendants to produce such a large number of e-mails is because so many e-mails were not produced during the discovery period. As described above, volumes of e-mails that were created during or prior to the discovery period, and which should have been produced long ago, appeared for the first time during the course of this Court’s Rule 37/Integrity hearing after the close of discovery. Defendants admit that, to this day, they have not reviewed for production the vast majority of the thousands of e-mails contained on the company’s backup tapes, with no authority for such conduct.

Moreover, Plaintiffs’ efforts to obtain internal Health Net e-mails through the process of discovery were often stymied by Defendants. In some instances, Health Net’s outside counsel were unaware of the extent to which their clients were not complying with court orders. For example, outside counsel James DelBello, Esq., acknowledged on March 9, 2006, that Plan Counsel Eileen O’Donnell’s recently-produced e-mails concerning the NJDOBI and restitution issues should have been produced in 2003 when discovery about those issues was underway. Outside counsel Heather Taylor, Esq., also testified on March 1, 2006, that she was unaware of Health Net’s practice of putting e-mails on backup tapes 90 days after creation, which made it impossible for most employees to access the e-mails through a search of their own. Nor was Ms. Taylor told of Health Net’s practice of permitting employees to delete e-mails within 30 days of creation or receipt, which could result in spoliation. Given that even Health Net’s own outside counsel did not know about such e-mail retention practices within the company, and that such outside counsel’s “search” for e-mails consisted of asking certain employees to search their own emails, it cannot be said that plaintiffs had any real opportunity to obtain the e-mails they sought during the discovery process.

The court stated it was aware that a significant amount of time and expense would be required to comply. However, it found that defendants’ predicament was due largely to their own repeated failures to respond in a timely manner to discovery requests and to court orders, and that the emails at issue should have been produced long ago.

At no time did Defendants inform either Plaintiffs or the Magistrate Judge as to how they stored e-mails; the numbers of e-mails needed to be searched; the cost of such search; or a plan for allocating the burden of e-mail production. Had candid disclosures to the Magistrate Judge occurred, an appropriate order could have been tailored to deal with these issues and keep costs down. The huge costs now being complained of could have been minimized by timely compliance when the e-mails were more current.

Thus, the court rejected defendants’ assertion that compliance with the court’s orders would cost them “millions of dollars and take months to complete.” The court observed:

Although the cost of compliance is indeed high, Defendants have litigated this case without regard to cost when it has been in their interest to do so. The cost Defendants must now incur is a direct result of non-compliant and deceptive discovery tactics and disregard of court orders throughout the course of discovery. This is evidenced by the various sanctions Judge Shwartz has imposed.

Moreover, the court pointed out that the financial burden was not one-sided. It noted that plaintiffs have taken many depositions and conducted evidentiary hearings of witnesses without the benefit of the document production ordered, and without even being informed that the documents ordered by the court to be produced had not in fact been fully produced. It noted that plaintiffs would now face great cost in time and money to decide whom to re-depose, and further stated: “The Court cannot redo the hearings that have gone on for months, and thus Plaintiffs will have lost the benefit of court testimony that might well have been beneficial to their case.”

In an effort to obtain production of those e-mails that are most important, and to speed up the completion of the production for the benefit of all involved, the court limited the scope of the March 9 Order to cover initially 59 identified persons. The earliest production would include email for 18 of those 59 persons, and email for the remaining individuals would immediately follow. The court further specified:

Defendants shall comply with Judge Shwartz’s March 9, 2006 Order, as modified herein, with all deliberate speed and weekly on a rolling basis (as documents are located) and shall submit weekly reports to the Court detailing which tapes and e-mails have been restored, searched and produced, the number of persons working on such production, and the number of hours spent by each on the production, and the entire production shall be completed by July 15, 2006.

The court also affirmed the magistrate’s order granting spoliation sanctions in the form of an adverse inference instruction regarding e-mails that a Rule 30(b)(6) witness admittedly deleted.