For e-Discovery Efforts “Wholly Devoid of Competence” and for Spoliation, Court Orders Sanctions and Prohibits Indemnification from Insurer

PIC Group, Inc. v. LandCoast Insulation, Inc., No. 1:09-CV-662-KS-MTP, 2011 WL 2669144 (S.D. Miss. July 7, 2011)

A Special Master determined that defendant’s discovery failures were largely the result of a “callous and careless attitude” rather than a “craven effort to hide or destroy information”, save one instance of intentional deletion by defendant’s Manager of Legal Affairs.  Adopting in part the Special Master’s recommendations, the court ordered sanctions, including production of the non-privileged contents of the manager’s hard drive and payment of plaintiff’s attorney’s costs and fees, with the condition that payment be rendered by defendant, not its insurance company.

A Special Master tasked with investigating defendant’s discovery efforts determined that several discovery failures had occurred, including spoliation.  Indeed, when describing his initial findings, the Special Master characterized defendant’s efforts as “wholly devoid of competence, yet only once motivated by guile.”  Among the failures reported were: 1) a lack of evidence of “any corporate policy, procedure, or concerted effort” on the part of defendant to “preserve electronic data;” 2) a lack of evidence that defendant or counsel “‘engaged anyone to preserve, collect, or examine potentially responsive ESI until long after’ it should have been” (the Special Master was able to easily locate ESI that defendant had not previously identified by “simply looking for it, in the same manner that a secretary looks for a document or email”); 3) defendant’s admission that an employee’s laptop had been stolen from his car and that the image of that drive taken before the theft had been lost; and 4) defendant’s admission that another computer had been erased two to three months after the incident from which this suit arose.  Most noteworthy, however, was the discovery that defendant’s Manager of Legal Affairs, a disbarred attorney acting as defendant’s “unofficial general counsel,” used antiforensic software to wipe his hard drive on the day it was collected.  Accordingly, the Special Master recommended sanctions to which defendant objected, particularly on the grounds of proportionality.

Summarized broadly, defendant’s arguments against sanctions were that the manager’s deletion of potentially relevant evidence was not intentional, that none of its discovery failures were the result of bad faith, and that plaintiff suffered minimal prejudice (a fact conceded by the Special Master).  Following consideration of the Special Master’s report and of defendant’s arguments, the court concluded that sanctions were warranted.  In so finding, the court indicated that the primary effects of defendant’s misconduct were “1) the tremendous expense of time and other resources that they have occasioned, and 2) the potential threat to the judicial process posed by such casual disregard for discovery obligations.”  The court cautioned against dismissing such effects as inconsequential, noting that the parties “will easily have rung up over a half million dollars in combined attorney’s fees, expenses, and costs associated with this discovery dispute, and the Court will have expended far more of its resources than it should have over the production of a few documents of questionable worth.”  The court also identified specific actions that warranted sanctions, namely those discussed above.  Regarding the issue of prejudice, the court reasoned that plaintiff had been prejudiced “by having to fight this discovery battle in the first place” and that plaintiff had been forced to incur substantial fees and expenses and was prevented from “timely and appropriate preparation for trial.”

Accordingly, the court declined to shift any portion of the Special Master’s fees to plaintiff; ordered defendant to pay plaintiff’s attorney’s fees and costs incurred as a result of defendant’s discovery failures; ordered production of the contents of the Manager of Legal Affair’s laptop (imaged after the erasure had taken place), save those contents that were subject to attorney-client privilege or which discussed settlement in this matter; and re-opened discovery on a limited basis.  The court declined the Special Master’s recommendation for additional monetary sanctions but adopted the recommendation that those already ordered were to be paid by the defendant and that defendant “shall not seek indemnification or reimbursement from their insurance company.”  In supporting its position, the court noted that other district courts had issued similar orders and reasoned that “[i]f corporate parties believe that they will be indemnified by their liability insurer for sanctions imposed due to misconduct in litigation, the punishment necessarily loses some of its sting.  The court’s primary purpose in imposing sanctions here is to ensure that the party responsible for this discovery dispute bears the resulting costs.”  The court also cited the secondary purpose of deterring such conduct in future, whether by the current parties or any others before the court.