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Repeated e-discovery violations can be costly to a client

Few cases in Maryland in recent years have highlighted the importance of accounting for emails and other electronic documents during discovery — and the ramifications for not doing so — more than Victor Stanley Inc. v. Creative Pipe, Inc. et al.

The case, filed in 2006, was an otherwise straightforward trademark and copyright infringement dispute over municipal park fixture designs. Calvert County-based Victor Stanley Inc. prevailed this fall with a verdict for monetary and injunctive relief. Creative Pipe has filed an appeal.

Beyond the merits, however, the case was a battle over the defendant’s defiance of e-discovery directives from the court.

During the five years of litigation, defendant Mark T. Pappas, CEO of Indian Wells, Calif.-based Creative Pipe Inc., violated repeated court orders to preserve electronic evidence. His documented actions, likened by one judge to a “cat and mouse game” with the court, included deleting emails, wiping computers’ hard drives of evidence and even replacing the company’s server to thwart the plaintiff’s case.

The record includes multiple written opinions from U.S. Magistrate Judge Paul W. Grimm, a recognized expert in e-discovery issues, who was brought in to handle allegations of electronic material destruction. The spoliation in the case drew a stern response from the court, which threatened Pappas with jail time, imposed more than $1 million in sanctions and entered a default judgment on one of the counts against Creative Pipe.

“Every lawyer working with a client who has any reticence about following the guidelines for e-discovery should show them this case and what can happen,” said Randell C. Ogg, a Washington, D.C., solo practitioner who represented plaintiff Victor Stanley Inc.

Experts say the case will provide more guidance for lawyers in how to protect themselves and their clients with the constantly evolving body of law dealing with the preservation of electronic materials for trial.

“With all of the factors in this case, it will reverberate around the world of electronic discovery,” said Aron U. Raskas, with the Law Offices of Arnold M. Weiner. “Even if sanctions like the ones in this case are not applied by other courts, the threat of them should get people’s attention.”

More zeal than skill

Based in Dunkirk, Victor Stanley is a manufacturer of park benches, trash receptacles and other items for largely municipal clients. The company filed the lawsuit after learning one “Fred Bass,” an alias for Pappas, had downloaded more than 100 computer files from Victor Stanley’s website. Pappas outsourced those drawings to Chinese manufacturers who reverse-engineered them. Pappas then competed against Victor Stanley in bid proposals for site-furnishing contracts. The suit also claimed that Creative Pipe went so far as to name one of its lines of products “Fuvista” — supposedly short for “FU – Victor Stanley.”

The case quickly got bogged down with discovery issues as Pappas was repeatedly hauled in front of the court for spoliation, or destruction, of e-discovery material. In one instance, Pappas defended his actions by saying that he archived emails in a folder called “delete” on his computer desktop and no longer had an external hard drive he was supposed to produce because he returned it to “Bob at Office Max.”

In a widely read and remarked-on 89-page opinion issued in September 2010, Grimm called Pappas out for the repeated violations. He also took a not-too-subtle jab at the effectiveness of Pappas’ efforts to destroy electronically stored information, or ESI.

“Pappas’s zeal considerably exceeded his destructive skill and his judgment in selecting confederates to assist in his efforts to destroy ESI without detection,” Grimm wrote. “While Pappas succeeded in destroying a considerable amount of ESI, Plaintiff was able to document this fact and ascertain the relevance of many deleted files. At the end of the day, this is the case of the ‘gang that couldn’t spoliate straight’.”

Grimm said that Pappas should face up to two years in prison for contempt if he was unable to pay the more than $1 million in sanctions within a certain time period. The threat of jail was overturned by the trial judge, Marvin W. Garbis, who did keep the monetary sanctions in place.

Defense attorney James A. Rothschild joined the case in 2008 after the initial issues with e-discovery were raised although he had to deal with the fallout of the sanctions and hearings related to the spoliation issues. He said working on the case drove home how important handling e-discovery properly is.

“I had never had anything close to this,” said Rothschild, of Anderson, Coe & King LLP in Baltimore. “It’s kind of like, here’s the real world of issues that e-discovery can create.”

The challenge

Experts say the importance of e-discovery will continue to grow, as more and more often documents never see a printed form and exist only as emails, PDF files or even exchanges on social media sites like Twitter and Facebook. Rothschild said in cases involving electronic material, lawyers can be at a disadvantage because while they provide guidance on what needs to be done, they are reliant on others in determining what the client has on hand.

“It’s a very uncomfortable situation,” Rothschild said, speaking generally and not about the Victor Stanley case. “You’re heavily dependent on the client or the experts to determine if what is being produced is what reasonably should be produced. It’s more out of your control than traditional document production discovery.”

Raskas, who was not involved in the Victor Stanley litigation, said convincing clients of the importance of retaining material and drafting and implementing a litigation can also be challenging.

“There is a resistance, even in the legal world, to grasp the extent of the responsibilities regarding electronic materials,” Raskas said. “People will look at you askance when you tell them what they need to do.”

The landmark litigation in e-discovery was Zubulake v. UBS Warburg, a gender discrimination case in the U.S. District Court for Southern New York. The five opinions that came out of the case in 2003 and 2004 were the first to specifically address the scope of a party’s duty to preserve electronic evidence, what the lawyer’s duties were for monitoring compliance, and the imposition of sanctions for spoliation of electronic evidence.

Seth Row, an e-discovery consultant with Parsons Farnell & Grein in Portland, Ore., said that in the years after the Zubulake decisions, awareness of e-discovery has greatly increased but there is still a lot of uncertainty among lawyers and clients about what needs to be done. He said most lawyers are going to run into business clients that are not going to have any idea about what is required of them regarding electronic materials.

“For … repeat players in litigation, the sophistication level is pretty high,” Row said. “But, there is a vast gulf between that level of sophistication and the average mid-market business client you’re going to have.”

A plan

Michael D. Berman, with Rifkin, Livingston, Levitan & Silver LLC, said one of the first things to do when facing the prospect of electronic discovery is to communicate with the client and get on the same page about what needs to be done.

“The lawyer’s obligation is to advise the client to impose a litigation hold and to discuss the details of the hold with the client and to pro-actively follow up and monitor the hold,” said Berman, co-author (with Grimm and Courtney Ingraffia “Charles” Barton) of a book on e-discovery published by the American Bar Association.

Raskas agreed that having an agreed-upon plan with the client is crucial in any case where e-discovery might be an issue. He said he spells it out at the engagement-letter phase, making clear what will be required in terms of preserving evidence for trial.

“You need to put it in writing and explain the risks of not taking the advice,” Row said. “What you can’t do is turn a blind eye to whether they are following the recommendations.”

“The days of being able to send one letter saying ‘Preserve all material,’ and then go no further with it, are gone,” he added. “The law has been saying that the lawyer’s responsibility goes far beyond that.”

Row said lawyers well-versed in the ins and outs e-discovery rules can exploit an opponent’s misstep for their own benefit.

“All litigators realize there is an opportunity to exploit if your opponent does something improperly,” Row said. “They can use that to drive up your litigation costs and push the case toward a favorable settlement for them if they can exploit some e-discovery misstep. There have also been cases where e-discovery missteps have made it less about the merits of the underlying case than on the conduct of the parties of the case.”

Like the Victor Stanley case, failings in e-discovery can also lead to sanctions and other actions. In March, the defendant in Green v. Blitz U.S.A. Inc., in the U.S. District Court for Eastern Texas, was hit with $250,000 in civil contempt sanctions for failing to turn over pertinent emails. In addition, the defendant was ordered to furnish a copy of the court’s memorandum and order to every plaintiff in every lawsuit against it — and, for the next five years, a copy of the memorandum and order must be filed along with the first pleading of every lawsuit in which the defendant is involved, in any capacity.

In the Victor Stanley case, the fallout from the sanctions still remains. Pappas, who has only paid $478,409 of the $1.04 million court-ordered sanctions, has until Dec. 15 to come into full compliance with that and a host of other conditions ordered by the court after Garbis ruled against them, or face the possibility once more of jail time and even more monetary sanctions.

“I think the message from this case is that lawyers need to take these obligations seriously and communicate that seriousness to their clients,” Ogg said.