Court Finds Party’s Discovery Performance “Clearly Egregious” but Undeserving of Harshest Sanctions, Orders Additional Discovery and Forensic Examination of Backup Systems to Verify Completeness of Production

Preferred Care Partners Holding Corp. v. Humana, Inc., 2009 WL 982460 (S.D. Fla. Apr. 9, 2009)

Following defendant’s discovery of thousands of relevant documents two months after the close of discovery and one month before trial, defendant ordered its employees to print the information and then to delete that information from their computers.  Defendant argued the information was deleted in furtherance of its obligations under a Confidentiality Agreement requiring the destruction of the information discovered and that printing the information fulfilled its preservation obligations related to litigation.  Finding that sanctions were warranted, the court ordered additional discovery into issues revealed by the newly discovered evidence at defendant’s expense and for defendant to allow plaintiffs to conduct a forensic examination of defendant’s backup system to verify its maintenance of deleted emails and to verify that all relevant emails were produced despite defendant’s directive to its employees to print and delete.

Prior to the initiation of litigation, plaintiffs, Preferred Care Partners Holding Corporation and Preferred Care Partners, Inc. (collectively “PCP”), allowed defendant Humana, Inc. to access confidential “due diligence information” during negotiations regarding the potential sale of PCP to Humana. PCP permitted such access under the terms of a Confidentiality Agreement that limited Humana’s use of the information and required the documents to be destroyed following the end of negotiations.  After sales negotiations broke down, PCP sued Humana alleging violations of the Confidentiality Agreement through misuse of the due diligence materials.

Two months after the close of discovery and one month before trial, Humana revealed that it had discovered over 10,000 pages of due diligence information that should have been destroyed under the terms of the parties’ Confidentiality Agreement.  Upon counsel’s notification of the discovery and his subsequent realization that additional employees may also have inadvertently retained similar materials, instructions were issued for relevant employees to conduct a search for additional responsive information, to print a copy to be sent to counsel, and to delete the information from their computers.  Humana did not consult with PCP or the court regarding this decision.  Thereafter, approximately 10,000 documents were produced to PCP.

PCP filed a motion for sanctions based on both the “document dump” and the deletion of documents pursuant to the “print and purge.”  Weeks after filing its motion for sanctions, PCP received 35 additional documents from Humana.  The 35 documents were culled from 60,000 documents that were delivered to Humana’s counsel the previous summer but were overlooked until the dispute arose over the late discovery of the due diligence documents.  The 60,000 documents had been provided to Humana’s counsel in a link from Humana’s IT department following a search of Humana’s computers for relevant documents.  Nonetheless, Humana’s counsel represented the documents had not previously been produced because she “did not realize [their] significance.”

Before laying out the “legal framework for analysis,” the court first stated that “it [was] clear from the outset that Humana failed to carry out its discovery obligations in accordance with the Federal and Local rules.”  The court then established its authority to impose sanctions under Federal Rules 16 and 37 as well as pursuant to its own inherent authority.  Discussing its latitude in ordering sanctions, the court noted that under Rule 37, the “magnitude of sanctions” was bound only by what is “reasonable in light of the circumstances.”  The court continued to explain, however, that its discretion was “not unbridled” and that the sanction of dismissal was not appropriate in cases of simple negligence, inability to comply, or misunderstanding as opposed to cases of bad faith, if the prejudice to the innocent party was not significant.  Under its own inherent authority, too, the court noted the need for restraint and specifically recognized “the strong preference for a determination on the merits of a dispute” as well as the need for sanctions that are both just and specifically related to the particular claim or defense affected by the misconduct.

With those principles in mind, the court determined that the requested sanctions, including default judgment and adverse inference instructions, were not warranted.  In so deciding, the court noted “that the record reflects that [Humana’s] shortcomings were neither intentional nor done in bad faith but rather resulted from the grossly negligent oversights of counsel.”  Accordingly, the court found that PCP would be allowed to conduct additional discovery pertaining the new information produced and for Humana to bear the reasonable cost of that discovery.  The court also permitted PCP’s damages expert to submit an amended report incorporating the information obtained in the late production.

The court then turned to PCP’s concerns regarding the completeness of Humana’s production based on:  a) its belief that Humana’s employees could not be trusted to have identified all responsive information during the “print and purge,” and b) the fact that because the information found on employees’ computers was printed and deleted, important information such as metadata was lost.  Sympathetic to PCP’s concerns and in light of Humana’s representation that the deleted data could be reconstructed by conducting an examination of its backup system where the deleted files were “preserved in [their] ‘native’ format”, the court ordered Humana to allow such an examination “for the purpose of verifying that the backup system maintains complete copies of all emails such that any purged emails would remain on the system; and that all emails were produced in spite of the print and purge directive.”  Any information discovered, including metadata or attachments to emails, which were deleted and not produced, would be provided to PCP.

Addressing also PCP’s concern arising from Humana’s representation that 60,000 documents had been culled to 35 as a result of de-duplication and removal of irrelevant documents, the court approved the parties’ agreement to allow PCP to conduct a forensic examination of Humana’s back-up system for the purpose of identifying any information provided to Humana’s counsel but not produced to PCP.

In summarizing its decision, the court justified its denial of PCP’s requests for more onerous sanctions stating:

[T]he undersigned finds that the errors committed by counsel were careless, not willful and that they were the produce of bad judgment, not bad faith. Moreover, PCP has not shown that the prejudice resulting from Humana’s untimely production is so severe that it cannot be remedied by imposing the lesser sanctions set out above.