A litigant’s obligation to preserve and collect relevant information at an
early stage in the litigation was strengthened recently by the judge who
authored the opinions in Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y.
2003). In Pension Committee of the University of Montreal Pension Plan v.
Banc of America Securities, No. 05 Civ. 9016 (S.D.N.Y. originally filed
January 11, 2010, and amended January 15, 2010), Judge Shira Scheindlin held
that after her July 2004 Zubulake decision, a party who fails to issue a
written litigation hold when litigation is first anticipated will be deemed
grossly negligent in their discovery practice, with potentially severe
consequences. The court held that gross negligence may also be found where
records are not promptly collected from key players and where e-mail or backup
tapes which are the sole source of documents for key players are destroyed.
While each spoliation case will turn on its own facts, issuing a legal hold and
initiating collection efforts very early now seems to be the undisputed
standard, for plaintiffs as well as defendants.
In November 2003, Plaintiffs, a group of sophisticated investors, retained
counsel to recover $550 million in losses from the liquidation of two hedge
funds in which they held shares. Plaintiffs filed suit in February 2004,
asserting claims under federal securities and New York laws against former
directors, administrators, auditors, and the prime broker and custodian of the
During the discovery process, one of the Defendants claimed that there were
substantial gaps in Plaintiffs’ document productions. Defendant Citco moved for
sanctions, seeking dismissal of the complaint or any lesser sanction the court
Shortly after being retained in 2003, Plaintiffs’ counsel had called and
e-mailed Plaintiffs with instructions to collect documents it needed to draft
the complaint and prosecute the case. While counsel distributed memoranda
instructing Plaintiffs to be over-inclusive in its document collection,
including e-mails and electronic documents, it did not instruct the clients to
preserve all relevant documents and information or give the clients specific
instructions or methods for collecting the documents.
The court found that the instructions given by Plaintiffs’ counsel did not
meet the standard for a litigation hold. Plaintiffs, in fact, did not issue a
written litigation hold until 2007, after the PSLRA stay had been lifted. The
court held that Plaintiffs had a duty to preserve their documents as of 2003 and
had failed to take adequate steps to do so.
According to the court, Citco then had the burden to demonstrate that
relevant documents were destroyed after this duty to preserve arose. The
standard of proof as to whether those documents were relevant and whether Citco
suffered prejudice hinged on whether Plaintiffs were grossly or simply
negligent. If Plaintiffs were simply negligent, Citco had to prove the relevance
of the missing documents, whereas if Plaintiffs were grossly negligent, the
relevance of the missing documents and resulting prejudice to Citco was presumed
(subject to rebuttal evidence).
The court determined that all Plaintiffs, in failing to institute a timely
written litigation hold, had acted in either a negligent or grossly negligent
manner. Generally, the parties who were found to have acted in a grossly
negligent manner had: (1) failed to collect or preserve any electronic documents
prior to 2007; (2) continued to delete electronic documents after the duty to
preserve arose; (3) failed to request documents from key players; (4) delegated
search efforts without any supervision from management; (5) destroyed backup
data; or, (6) submitted misleading or inaccurate declarations
The court found some parties acted in only a negligent manner, even though
they had not issued legal holds, holding that in early 2004, the duty to issue a
hold in Florida was less firmly established, thus more leniency was required.
Examples of Plaintiffs’ negligent conduct included: (1) failure to clearly
instruct employees with possible involvement with the hedge funds to preserve
and collect all records related to the funds; (2) searches conducted without any
supervision from management; and, (3) failure to search a Palm Pilot belonging
to the president of the company.
The court awarded the sanction of a jury charge against the parties who were
found to have acted in a grossly negligent manner. Some of the parties who had
engaged in less egregious acts were ordered to conduct additional discovery. All
Plaintiffs were required to pay monetary sanctions.
This opinion cements the well-known concept that a clear, detailed document
preservation notice should be issued and preservation initiatives implemented as
soon as a party -- whether plaintiff or defendant -- is on notice of potential
litigation. In addition, parties must initiate document collection efforts, at
least for key players, early in the litigation with close supervision by
management or outside counsel. Failure to do so may result in a finding of gross
negligence, so that any missing information may be deemed relevant, and
prejudice to the opposing party may be presumed. As Judge Scheindlin held,
“[w]hile litigants are not required to execute document productions with
absolute precision, at a minimum they must act diligently and search thoroughly
at the time they reasonably anticipate litigation.”