Amended FRCP 37(e) Provides Rules Governing ESI Preservation and Sanctions

Amended Rule 37(e) of the Federal Rules of Civil Procedure (“FRCP”), effective as of December 1, 2015, squarely addresses sanctions for the spoliation of electronically stored information (“ESI”) and overrules Second Circuit jurisprudence in the area. Some commentators have called FRCP 37(e) the most significant rule governing eDiscovery since the Zubulake line of cases.

Prior to the adoption of FRCP 37(e), there existed a split among the Circuits as to the grounds for sanctions arising from the spoliation of ESI. In 2002, in Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002), the U.S. Court of Appeals for the Second Circuit permitted sanctions for negligent failure to preserve. That decision conflicted with less stringent standards in the Fourth, Tenth and Eleventh Circuits, which required a showing of “willfulness” or “bad faith” to support sanctions for spoliation. FRCP 37(e) rejected the Residential standard in favor of a bad faith standard for the imposition of more serious sanctions.

FRCP 37(e), titled “Failure to Preserve Electronically Stored Information”, states:

If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

FRCP 37(e) is comprised of three parts: 1) a 3-step test for when the rule applies; 2) a remedy proportional to the “prejudice” to the harmed party; and 3) “intent to deprive” as a predicate to the most grievous sanctions.

FRCP 37(e) only applies when all of three conditions are met: 1) the ESI should have been preserved; 2) the ESI was lost because a party failed to take reasonable steps to preserve it; and 3) the ESI cannot be restored or replaced through additional discovery. For the first time, the FRCP addresses, indirectly, the obligation to preserve ESI, but builds in a safe harbor for ESI lost where a party has timely taken “reasonable steps” to preserve ESI.

The Committee Notes to FRCP 37(e) make the following observations about “reasonable steps”:

Due to the ever-increasing volume of electronically stored information and the multitude of devices that generate such information, perfection in preserving all relevant electronically stored information is often impossible. As under the current rule, the routine, good-faith operation of an electronic information system would be a relevant factor for the court to consider in evaluating whether a party failed to take reasonable steps to preserve lost information, although the prospect of litigation may call for reasonable steps to preserve information by intervening in that routine operation. This rule recognizes that “reasonable steps” to preserve suffice; it does not call for perfection. The court should be sensitive to the party’s sophistication with regard to litigation in evaluating preservation efforts; some litigants, particularly individual litigants, may be less familiar with preservation obligations than others who have considerable experience in litigation.

Because the rule calls only for reasonable steps to preserve, it is inapplicable when the loss of information occurs despite the party’s reasonable steps to preserve. For example, the information may not be in the party’s control. Or information the party has preserved may be destroyed by events outside the party’s control — the computer room may be flooded, a “cloud” service may fail, a malign software attack may disrupt a storage system, and so on. Courts may, however, need to assess the extent to which a party knew of and protected against such risks.

Another factor in evaluating the reasonableness of preservation efforts is proportionality. The court should be sensitive to party resources; aggressive preservation efforts can be extremely costly, and parties (including governmental parties) may have limited staff and resources to devote to those efforts. A party may act reasonably by choosing a less costly form of information preservation, if it is substantially as effective as more costly forms. It is important that counsel become familiar with their clients’ information systems and digital data — including social media — to address these issues. A party urging that preservation requests are disproportionate may need to provide specifics about these matters in order to enable meaningful discussion of the appropriate preservation regime.

When a party fails to take reasonable steps to preserve electronically stored information that should have been preserved in the anticipation or conduct of litigation, and the information is lost as a result, Rule 37(e) directs that the initial focus should be on whether the lost information can be restored or replaced through additional discovery. Nothing in the rule limits the court’s powers under Rules 16 and 26 to authorize additional discovery. Orders under Rule 26(b)(2)(B) regarding discovery from sources that would ordinarily be considered inaccessible or under Rule 26(c)(1)(B) on allocation of expenses may be pertinent to solving such problems. If the information is restored or replaced, no further measures should be taken. At the same time, it is important to emphasize that efforts to restore or replace lost information through discovery should be proportional to the apparent importance of the lost information to claims or defenses in the litigation. For example, substantial measures should not be employed to restore or replace information that is marginally relevant or duplicative.

When the conditions of the 3-part test are met, the Court may order measures no greater than necessary to cure prejudice to another party from the loss of the information where a Court finds prejudice. Where a Court finds that a party acted with intent to deprive another party of the use of ESI, the Court may presume the lost information was unfavorable to the party, provide an adverse inference instruction to the jury, or dismiss the action or enter a default judgment. As FRCP 37(e)(1) and (2) are disjunctive, one need not demonstrate “prejudice” in the presence of “intent to deprive”.

Accordingly, counsel should thoughtfully advise clients about how to respond to a legal hold notice, how to avoid over-preservation, and concerning the adoption of a written legal hold policy that may later be subject to scrutiny by an adverse party and the court. Counsel should have clients identify the custodians and data stewards most likely to have relevant information and encourage the client to regularly monitor compliance with the legal hold policy.

 
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