For over a year, we have been writing about a West Virginia decision (and its progeny) that we believe went too far in making new e-discovery law. The original decision, issued May 18, 2010, was styled Mt. Hawley Insurance Co. v. Felman Production. You can read my original post at: Bad Facts Make Bad Law: ‘Mt. Hawley’ A Step Backward for Rule 502(b).
In that decision, Magistrate Judge Mary E. Stanley held that Felman had waived attorney-client privilege by inadvertently producing a smoking-gun email to counsel suggesting that it might be helpful to their insurance claim for business interruption to backdate several orders from clients. If the orders had come in while the machinery in question was under repair, that might provide support for their $38 million dollar insurance claim. You have to love their chutzpa at the very least.
The 'smoking-gun' email involved a furnace such as this one, at Felman's West Virginia facility.
In my original post, I suggested that bad facts (outright fraud it seemed to me) might be responsible for what I thought was bad law. After all, the production had been overseen by a highly reputable law firm (which had no involvement in this email). Counsel had not only been diligent in trying to screen out privileged documents, but it had gone far beyond what we have typically seen elsewhere. Indeed, counsel cited over 20 steps they had taken, including a variety of review and sampling efforts:
- Negotiated the ESI stipulation with defendants.
- Hired an ESI collection vendor, Innovative Discovery.
- Discussed with Felman’s IT department the company’s computer network structure and identified potential sources of relevant ESI.
- Visited Felman’s West Virginia plant to coordinate and oversee ESI collection.
- Decided to collect data using forensic imaging.
- Directed the vendor to collect ESI from the current server and the backup server.
- Collected 1,638 gigabytes of data.
- Downloaded emails from 29 custodians for processing by its law firm, Venable.
- Hired a new vendor to process Felman’s Oracle and Soloman databases.
- Identified the first six workstations to be processed and learned that each contained more data than anticipated.
- Examined methods to cull non-relevant materials.
- Selected search terms to retrieve documents responsive to defendants’ document requests.
- Tested the search terms against the Felman emails and added additional search terms.
- Tested the search terms, including the additional terms, against the Felman emails, tagged responsive documents, and set them aside for privilege review.
- Produced 17,064 Excel spreadsheets.
- Selected privilege search terms to identify materials which are potentially privileged and relevant.
- Set aside potentially privileged materials for individualized document-by-document review for relevancy and privilege.
- Tested the privilege search terms against Felman’s emails.
- Retrieved native files of all images and examined thumbnails.
- Conducted “eyes-on” review of all documents identified both as relevant and potentially privileged.
- Decided to use a vendor to complete the processing of Felman’s emails.
- Produced ESI in native or TIF format, with 36 fields of metadata.
- Produced more than 346 gigabytes of data without sampling for relevancy, over-inclusiveness or under-inclusiveness.
Counsel got nailed simply because several of the Concordance indexes they used turned out to be corrupt. As a result, privilege searches didn’t turn up anything for the documents in those indexes. Since counsel didn’t attempt to review every one of the millions of documents they produced, several key documents slipped through the net. Reading between the lines, Magistrate Judge Stanley seemed to lay blame on the fact that they did not appear to sample the documents that they produced but never reviewed to see if any might be privileged.
We wrote about subsequent decisions as well as other commentary about the decision here:
- Data-indexing Glitches and Inadvertent Disclosure: More on ‘Mt. Hawley’.
- Judge Grimm: ‘Mt. Hawley Set the Search Bar too High.
- Mt. Hawley Postscript: Bad Facts Don’t Help on Appeal.
- Finally Forgiveness: Magistrate Recognizes that E-Discovery Software Isn’t Perfect.
- Mt. Hawley Revisited: Bad Apples Make for Bad Law.
- Bad Facts Make Bad Law: ‘Mt. Hawley’ A Step Backward for Rule 502(b).
- Failure to Sample Keywords Waives Privilege, Court Rules.
Now, in what has to be the final straw in this saga, the presiding judge in the case, U.S. District Judge Robert C. Chambers, has taken the ultimate step by issuing further sanctions and dismissing the lost-business claim: Felman Production v. Industrial Risk Insurers, 2011 U.S.Dist. Lexis 112161 (Sept. 29, 2011).
Let us look at the court’s reasoning.
Bad Discovery Practices
U.S. District Judge Robert C. Chambers
You can’t read any of the Mt. Hawley decisions without being reminded that both the magistrate judge and the district judge were not happy with Felman’s discovery practices. Among others we have chronicled, you won’t win favor with the courts by backing up the trucks and dumping a ton of irrelevant electronic files on the opposition. When you go the next step and make every one of them confidential, regardless of content, you only worsen your position. The judge was particularly incensed to see pictures of kitties with a big confidential stamp on them. Kitties. Yes kitties. Awww, how cute. Oh, but there were a couple of naked men in the photos too (although not with the kitties, thank heavens).
There were also missing files and no real attempt to issue a litigation hold by Privat, the Ukrainian company that was at the controls in this case. Indeed, it appears that party Felman actively dissembled with respect to its true owners, a fun loving bunch of Ukranians with little respect for the discovery process. They got caught when one of the inadvertently produced documents showed that they were running the show. Oh what a tangled web they weaved!
As Judge Chambers explained:
Felman’s failure to comply with Judge Stanley’s August 19 and October 19, 2010 Orders was inevitable in light of the lack of care Felman exercised. … Felman did not provide litigation hold memos to the West Virginia Felman staff until four months after this case was filed. Felman also admitted that the Ukrainian custodians were not instructed to preserve their documents.
This led to the destruction of documents when the Privat representatives sold their computers before receiving a document request. Convenient, to say the least.
All this led to a motion for sanctions—either a dismissal outright or dismissal of the business interruption claims plus an adverse inference instruction regarding the missing documents.
The judge made short order of the motion. While not dismissing the case outright, he did dismiss the $38 million business interruption claim. He started by discussing spoliation, citing Magistrate Judge Grimm in Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 522 (D. Md. 2010).
A party subject to [the duty to preserve] must “identify, locate, and maintain information that is relevant to specific,predictable, and identifiable litigation.” In ascertaining whether a party has fulfilled its duty to preserve, a court must “determine reasonableness under the circumstances … [which] in turn depends on whether what was done—or not done—was proportional to that case and consistent with clearly established applicable standards.
The court went on to find specific culpability—gross negligence—in Felman’s failure to issue litigation holds and otherwise take steps to preserve evidence.
In the end, the court didn’t dismiss all claims but rather threw out the big one—for business interruption. It left the other claims and counterclaims to be tried.
The sanctionable conduct of Felman and the resulting prejudice to Defendants merits dismissal fo the business interruption claim because the unavailable evidence and improper conduct related predominantly to it. As to Defendant’s counterclaim, the unavailable evidence is less prejudicial and an adverse inference instruction is an adequate remedy.
The court also went on to award attorneys’ fee in the bargain.
What Happens Next?
My guess is that we won’t hear any more from the parties in this case. The business interruption claim was the heart of Felman’s demand in the first place. An adverse inference instruction is a powerful tool to address the rest of the claims, at least to the extent Felman oversteps the bounds of its insurance policy. Settlement is the likely next step in this matter.
What about a malpractice claim? Given the Felman party antics, I wouldn’t put it past them. They might claim malpractice for producing the damaging documents. With a bogus claim for $38 million at stake, who knows what they might do. At the least, this would present interesting evidentiary questions for the firm’s malpractice carrier. I wouldn’t want to be in the settlement meeting.
But my concern is for other cases more than for how this one wraps up. With 23 steps being ruled as not enough, what will be adequate? Perhaps the problem could have been remedied by some simple sampling procedures, but that isn’t clear from anything I read. Perhaps enough other judges will choose to ignore it so that it becomes weak precedent. “A derelict on the waters of the law,” as famed Supreme Court Justice Felix Frankfurter once said. That’s my vote. Send the bad guys home but leave e-discovery law alone.
