Legal Hold Pro

Orbit One v. Numerex: Magistrate Judge Francis Offers His View on Legal Holds

By Brad Harris

Orbit One Communications, Inc. v. Numerex Corp., 2010 WL 4615547 (S.D.N.Y., Oct. 26, 2010)

In late October, Magistrate Judge James Francis issued an opinion that has continued the judicial debate about legal holds and other preservation practices kicked off in January 2010 with Pension Committee. Judge Francis in Orbit One openly disagrees with some of Judge Scheindlin’s Pension Committee stances including issuing sanctions for failing to issue a written legal hold as well as challenging The Sedona Conference’s take on proportionality, as Ralph Losey points out in his review of the case last week.

Let’s start with a quick recap of the case. It’s a situation where an acquisition went bad when Numerex acquired satellite communications provider Orbit One Communications. As part of the acquisition, Numerex offered $6 million worth of performance incentives for Orbit One execs to stay and run their former company as a standalone division.  However, when sales were clearly falling well short of earning those big bonuses, the execs alleged that the acquirer was mismanaging them and undermining their ability to earn incentives, thus devaluing the deal.  Orbit One’s shareholders and executives brought a suit and were then countersued by Numerex.

As the case went through discovery, Numerex’s attorneys probed on preservation and a few discrepancies were discovered.  In general, the legal team acted reasonably well in issuing timely legal holds, especially given the standards of 2007 when this was taking place. They suspended routine destruction of back-up media and saved equipment.

Some doubts about information were cast about the following actions by Orbit One’s CEO David Ronsen:

1. He archived some of his corporate email at the urging of the IT department as part of a documented ISO-driven information management initiative. Ronsen did delete some files at that time, but they predated the Numerex litigation and were mainly personal items such as music.  At that point there was no trigger event about the Numerex case.
2. At the time of his archiving, Ronsen failed to alert the IT administrator that he was on a legal hold for an unrelated IP case which may have changed how the information was handled.
3. He also had under his personal control several external hard drives, including the back-up media from the server that had been stored in his safe, as well as his original desktop computer. When requested, Ronsen turned over the external hard drives and the veracity of the data on those media may have been checked (a forensic expert did review other ESI) but no mention is made in the opinion.

In light of these issues (relatively minor when compared with Judge Grimm’s Victor Stanley II opinion!), the defendants sought an adverse inference instruction from Judge Francis for spoliation and an award of attorneys’ fees and costs.  Judge Francis denied the motion despite acknowledging the failure to “engage in model preservation” because there was insufficient evidence that any lost ESI was relevant to the case.

What We Learned from Orbit One

As we’ve seen all year, the judiciary appears to feel the need to react to Judge Scheindlin’s Pension Committee and the bright lines that she drew around preservation.  With Orbit One, Judge Francis is throwing his proverbial hat into the ring.

Courts Are Still Digesting Pension Committee

Clearly some in the judiciary are still having a hard time swallowing Judge Scheindlin’s assertion that legal holds must be in writing.  When reviewing Pension Committee, that determination is specific to the facts of the case.  The sanctioned litigants were deemed to have failed to meet the contemporary standard and she determined that issuing a litigation hold in written form is a reasonable way for litigants to demonstrate the discharge of their preservation obligations.

The key point is that in Pension Committee, 13 of the 96 plaintiffs were deemed that they should have known and done better. Further, Judge Scheindlin specifically detailed her finding of gross negligence for six plaintiffs based on further missteps in addition to failing to issue a timely written litigation hold. Judge Francis draws an implication that because she found the plaintiff’s actions to be negligent, that discovery relevance was no longer considered.  Yet the Pension Committee opinion goes to great lengths to describe both relevance and culpability.

So when Judge Francis states that, “If this is a fair reading of Pension Committee, then I respectfully disagree,” it appears that he reached an implication that was not founded on the facts of the opinion.

In a related pronouncement in Orbit One, Judge Francis indicates that in some cases when an enterprise is small, that a formal litigation hold may not necessary.  Again, Judge Scheindlin does leave that to the discretion of the court, but her position is that a written hold is easy to do and should be expected so as to avoid spoliation and help avoid undue burden on the courts.

In Ralph Losey’s review of Orbit One, he accurately summed up a pragmatic approach to litigation holds:

I would not want rely on Judge Francis’ suggestion that verbal notices are ok and a formal lit-hold might not be necessary. I think that preservation notices should always be in writing, even for “small enterprises.” The only exception I can see is for an individual or sole-proprietor with no employees. I don’t think they should send a written notice to themselves, but their lawyer should notify their clients in writing of the duty to preserve.

He continued:

Bottom line to all of this, you should put your preservation notices in writing and follow-up with the key players, talk to them, and take other reasonable steps under the circumstances to preserve relevant information. Do not count on the client, the party to the litigation, to do all that is required, which is exactly what happened in Orbit One.

Losey encapsulated a prudent approach that, based on the numerous opinions, more accurately represents the current expectation of the courts.

Bright Lines Make for Easy Targets

The downside of Judge Scheindlin’s attempt to draw a bright line is that it creates an opportunity for opposing counsel to exploit an opponent.  Remember that in Pension Committee Judge Scheindlin wrote in the introduction that the objective is not for perfection but primarily to ensure that “relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing parties.”

What Orbit One represents is one side trying to exploit Pension Committee inappropriately. The record shows that there was little spoliation, the plaintiff’s counsel did a decent job issuing the legal hold, and that Ronsen complied for requests for production.  Was everything by the “best practices playbook?”  Clearly no. However, there was never any persuasive argument that anyone acted in bad faith and that any prejudicial ESI was lost.

So what’s a little confounding is on what grounds the counsel for Numerex felt they could approach the court asking for an adverse inference instruction. The standard for determining such a harsh sanction as Judge Francis lays out is that: a) evidence was lost and the party who had control of it knew it had an obligation to preserve; b) the records were destroyed “with a culpable state of mind”; and c) the destroyed evidence was “relevant” to the party’s claim or defense.

In Orbit One, the defendant did not come close to meeting this standard.  It appears as if it was a “long ball” by the defense to gain maximum leverage.  It failed. In fact, based on this opinion, it wasn’t even close. It’s surprising that Judge Francis didn’t acknowledge this and felt the need to write such a lengthy response to the motion.

What Orbit One Means to Legal Holds

Judge Francis’s Orbit One opinion is an alternative perspective from the Southern District of New York, arguably the epicenter of electronic discovery among the Federal Judiciary. It is definitely a different way to look at things, but it is also possible that it was a bit of reaction (and some would say an overreaction) to Pension Committee. Here are three conclusions:

1. Cease issuing legal holds in written form at your own risk – Written holds are still the way to go.  Judge Scheindlin’s stance that they are a reasonable process to meet one’s preservation obligation may meet some judicial resistance, but mainly because they appear to be interpreting it in an absolute way in every single matter. She herself didn’t intend it to be interpreted that rigidly. (See her recent public comments.)  By not using a written form to issue a hold, the exposure to sanctions if spoliation were to occur is exponentially higher as well as not meeting the contemporary standard which opens the door to negligence and gross negligence determinations. Verbal holds are weak and easily challenged, so it is a big risk to not undertake a written hold.
2. Opposing counsel is hyper-focused on preservation issues – The plaintiff actually did an okay job of preserving information.  However, there were some flaws and this motion was all about maximizing a tiny sliver of opportunity.  Conduct your preservation thoughtfully and thoroughly so you can avoid getting dragged into lengthy discovery battles because opposing counsel are going to be probing relentlessly for the foreseeable future.  Send the hold.  Follow-up with your custodians to ensure they are taking appropriate actions.  Issue periodic reminders.  Stay engaged as counsel.
3. Is there a backlash coming? – Going hand-in-hand with the prior conclusion, some litigants may be relying too much on exploiting imperfect e-discovery practices.  It seems like only a matter of time before someone gets a serious rebuke for wasting the courts time for trying to make something out of nothing.  Remember, perfection is not the standard and dragging the court into a lengthy discovery battle comes with its own risks.

Some may wish to interpret Orbit One as a rebuke of Pension Committee and, thus, a loosening of the expectations around a legal hold.  That may be the eventual result, but it is far too early to tell and, frankly, it seems on the argument presented that it would not be a likely outcome.

Additional Reading:

• Losey, Ralph, “Magistrate Judge in NY Says Verbal Hold Notice May Be Ok and Questions the Value of Proportionality,” E-Discovery Team Blog, November 30, 2010
• Copy of full opinion
• K&L Gates, “No Matter How Inadequate a Party’s Preservation Efforts May be … Sanctions are Not Warranted unless there is Proof that Some Information of Significance has Actually Been Lost,” E-Discovery Law Blog, November 19, 2010

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