Mr. Brewer III

Hospitality Law

Electronic Discovery in Hotel Litigation: A Masters Class For Industry Principals

By William A. Brewer III, Co-Founding & Co-Managing Partner, Bickel & Brewer

I once suggested in this publication that electronic discovery (e-discovery) can make - or break - a case in bet-the-business hospitality litigation. That column (http://hotelexecutive.com/business_review/190/managing-a-major-hotel-lawsuit-how-electronic-discovery-can-make-–-or-break-–-your-case) generated widespread interest among industry owners, operators, managers and investors seeking to understand the importance of e-discovery and the vital role it plays in the litigation process. In this expansive follow-up column, I offer a "master's class" on the topic that discusses what industry principals should know regarding the preservation of evidence. I firmly believe that in this era of mega-cases, few things are more important than understanding one's obligation to collect, store and produce electronic information.

With the proliferation of electronically-created and stored information, discovery of electronic information (“e-discovery”) is a complex and expensive part of any significant piece of litigation. What many business executives do not appreciate is that a party’s failure to comply with the rules regarding e-discovery – in particular, those governing the preservation of electronically stored evidence – can lead to harsh penalties. Thus, it is critical that hotel industry principals – owners, asset managers, operators, lenders and others – understand their obligations to preserve relevant corporate records and, thereafter, to collect and produce such records to the opposing party after litigation has begun. As one court recently noted: “By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records – paper or electronic – and to search in the right places for those records, will inevitably lead to the spoliation [destruction] of evidence.”

In addition to the federal statutes and rules that mandate the preservation of corporate documents of public companies and companies operating in specific industries, the obligation to preserve evidence, including electronically stored information, also arises from court-imposed preservation rules that apply to all companies, public, private, large and small. The key questions that executives must answer are:

• When does the duty to preserve evidence arise?
• What evidence must be preserved?
• How do I ensure that evidence is not destroyed?

Fortunately, the law governing e-discovery is developing rapidly, and courts have provided guidance to these and related questions.

The Duty To Preserve: Triggering Events

A company’s obligation to preserve “evidence” arises when litigation is reasonably anticipated. Because plaintiffs control the timing of the commencement of litigation, a plaintiff’s duty to preserve relevant evidence is typically triggered before a complaint is filed and litigation formally commenced. For example, a corporate plaintiff may reasonably anticipate litigation during its pre-suit investigation of claims. On the defense side, the duty to preserve is clearly triggered when a company is served with a complaint, is the recipient of a subpoena that identifies the company as having information relevant to a litigation in which it is not a party, or is the recipient of a notice that it is target of a government investigation. But, like plaintiffs, the duty to preserve can be triggered before the receipt of a formal complaint or subpoena, such as upon receipt of a cease and desist letter, demand letter or other notice of potential litigation.

In a seminal e-discovery case involving a discrimination claim brought against UBS Warburg, plaintiff had filed a complaint against UBS Warburg with the EEOC. In determining when the company’s duty to preserve evidence was triggered, the federal court held that the triggering date was five months before plaintiff filed her discrimination complaint with the EEOC. This was based on emails from company employees that demonstrated that they knew plaintiff intended to sue the company.

One particularly thorny issue for companies and their counsel is the determination of whether a threat of litigation is sufficiently credible to trigger the duty to preserve. Such a determination is fact-driven, and requires an analysis of several factors, including: (1) the nature and specificity of the claim or threat; (2) the party making the claim or threat; (3) the position of the party making the claim or threat; (4) the business relationship between the accused and accusing parties; (5) whether the threat is direct, implied or inferred; (6) whether the person making the threat is known to be aggressive or litigious; (7) whether the company has learned of similar claims; and (8) the existence of press or industry coverage of similar complaints brought against others similarly situated in the industry. These credibility determinations should be made by someone experienced in the company who can identify and analyze the relevant factors, and make a reasoned decision that will withstand scrutiny by a reviewing court.

Another issue, especially for large corporations, is ensuring that threats of litigation are received by the appropriate individuals within the company, so that a credibility determination can be made and, if necessary, preservation efforts timely implemented. Finally, companies should adopt written policies that identify the steps they should follow to identify whether the duty to preserve evidence has been triggered. Such policies should identify the processes in place to ensure that the appropriate individuals within the company receive the litigation threat in the first instance, and the steps that the company takes to determine if a threat of litigation is credible.

Implementing The Preservation Process: The Litigation Hold

Once the obligation to preserve relevant evidence is triggered, the company must implement a document preservation plan, commonly referred to as a “litigation hold.” A litigation hold attempts to ensure that relevant information is not destroyed and that key employees are notified of document retention requirements. Initially, the company must suspend its routine document retention (or destruction) policies – including those preservation obligations contained in hotel management agreements – with respect to those documents that should be preserved. Thus, the litigation hold may include back-up procedures or instructions for users regarding deletion of certain files, including back-up storage devices.

The duty to preserve evidence does not extend to every e-mail and other electronic document in the company’s possession. Rather, a company is legally obligated to preserve those documents (hard copy and electronic) that are relevant to the subject matter of the dispute. Such documents typically include those that are created by the “key players” to the dispute, as well as documents created for those individuals. The duty to preserve also extends to documents that are reasonably calculated to lead to the discovery of admissible evidence, documents that are reasonably likely to be requested during discovery, and/or documents that are the subject of a pending discovery request. It is critically important to understand that relevant documents include not only those documents that are supportive of a client’s case, but also those that are potentially harmful.

Once the duty to preserve is triggered, the company and its counsel should identify all sources of potentially relevant information in its possession, custody and control. Thus, in addition to the obvious sources of information – such as file cabinets, desktop computers and the company’s central email servers – the company must also consider information stored on backup tapes, laptops, CD-ROMs, thumb drives, handheld devices, hard drives, personal computers of employees, digital cameras and voice mail. Having identified the sources of stored information, company and its counsel must then collect the various types of information that are relevant to the dispute. This includes not only active data (such as word processing documents and spreadsheets stored on computers), but also residual data (data that the computer has deleted, but is still available because it has not yet been overwritten), email (both current and archived), and metadata (additional data that is automatically attached to each electronic document but not visible on the face of the document, such as the date that the document was created, the author of the document, edit dates, and prior versions of the document).

In order to ensure that all relevant information is identified and retained, the company should not simply rely on its employees to search and collect documents that they believe are relevant and responsive to the litigation hold. Rather, the process should be supervised by legal counsel who should become actively involved in the preservation and collection process. The company should permit its counsel to interview the key players in the litigation to understand what relevant information they have, and how (e.g., email or hard copy) and where (e.g., hard drive or file cabinet) they store it. The company should also allow its counsel to interview its information technology personnel who can explain the company’s back-up procedures, document retention policies and data retention “architecture” – i.e., the computerized data storage system.

Once formulated, the litigation preservation plan should be memorialized in writing and distributed to, at a minimum, the company’s “key players” – i.e., those employees likely to have information relevant to the dispute. Although the written litigation hold may vary depending upon the type of organization and nature of the dispute, it should, at a minimum, (1) identify the people who are likely to have relevant information and instruct them to preserve relevant documents; (2) clearly describe the dispute in a manner that will be understood by each of the recipients; (3) provide examples of the types of documents to be preserved (for example, “all documents, including emails, created by or sent to John Smith”); and (4) advise the recipients of their legal duty to preserve documents, and the potential penalties to the company and the recipient for noncompliance.

Such a notice allows employees to use the instructions as a reference and creates a record of the company’s good faith fulfillment of its duty to preserve evidence. In addition, the document hold should be periodically redistributed, and kept in place until the conclusion of the litigation – i.e., at least until the deadlines for all appeals have expired. Finally, it is not sufficient for a company to simply notify its employees that a litigation hold is in place and passively expect that they will retain and produce to company counsel all relevant information. Rather, the company should designate legal counsel to actively monitor compliance with the litigation hold, answer questions that company personnel may have regarding their obligations, and distribute updated notices if the nature of the litigation hold changes as a result of developments in the litigation.

The Cost of Electronic Discovery

Another critical issue that arises in connection with electronic discovery is the cost of such discovery. Once relevant documents are identified and preserved, they must be produced to opposing counsel in response to document requests. The general rule is that the party producing documents must bear the expense of complying with the document requests. When it comes to producing electronic documents, the cost can be unduly burdensome and expensive, especially if the requesting party seeks information that is only available on inaccessible media, such as backup tapes. The solution devised by the courts to protect a party from such undue burden and expense is to consider whether the cost of discovery should be shifted to the party seeking discovery.

In conducting a cost-shifting analysis, the central question considered by courts is “how important is the evidence sought in comparison to the cost of production?” In order to aid its evaluation, courts analyze the following factors: (1) the extent to which the request is specifically tailored to discover relevant information; (2) the availability of such information from other sources; (3) the total cost of production, compared to the amount in controversy; (4) the total cost of production, compared to the resources available to each party; (5) the relative ability of each party to control costs and incentive to do so; (6) the importance of the issues at stake in the litigation; and (7) the relative benefits to the parties of obtaining the information. Of course, these factors should be considered not only when on the receiving end of a document request, but also before a party requests otherwise inaccessible electronic information.

Sanctions and Remedies For the Destruction of Evidence

The need to preserve the integrity of the judicial process underpins a court’s inherent power to impose sanctions for the destruction of evidence. Sanctions that a court may impose are left to the discretion of the trial judge and are assessed on a case-by-case basis. Depending on the particular circumstances of the case, sanctions can be harsh for an intentional failure to “hold” relevant information. For example, a court can give the jury an “adverse inference” instruction – i.e., an instruction that the jury is permitted to infer from the fact of destruction that the destroyed evidence would have been harmful to the party who destroyed the evidence. On a practical level, such an adverse inference can effectively end the litigation because the spoliator will have a difficult time overcoming the presumed inference. Other available sanctions are the exclusion of the spoliating party’s evidence, the imposition of fines, cost-shifting, and the most severe sanction, the dismissal of the case or an entry of default judgment against the spoliating party.

In determining the severity of the sanction, courts will examine the offending parties’ level of culpability – i.e., whether the destruction of documents was negligent, grossly negligent, or willful – and, for more severe sanctions, the relevance of the lost documents and degree of prejudice to the non-offending party. The degree of culpability has added significance because, if the non-offending party is seeking a severe sanction, the required elements of relevance and prejudice may be presumed if the party who destroyed the evidence acted willfully or was grossly negligent. Indeed, in light of the now-developed case law that establishes and defines the contours of the duty to preserve evidence, a party’s failure to issue a written litigation hold, suspend its routine document retention policies, collect emails and other electronic documents from “key players,” preserve the documents of former employees (to the extent they are in the company’s custody and control), or preserve backup tapes when they are the sole source of relevant information, may likely be deemed to be at least gross negligence, which triggers the presumptions of relevance and prejudice and paves the way for severe sanctions.

Summary

Industry principals must be well-versed in their duties to preserve information when litigation is reasonably anticipated. In addition, once the duty to preserve is triggered, companies and their counsel must work together to ensure that relevant documents are collected, stored and produced. The destruction of relevant documents – even when inadvertent – may lead to costly, or even litigation ending, sanctions.

Bickel & Brewer partner Alexander D. Widell contributed to this article.

William A. Brewer III is co-founding and co-managing partner of Bickel & Brewer, with offices in Dallas and New York. Under Mr. Brewer's direction, Bickel & Brewer has become renowned for its innovative handling of disputes within the hospitality industry. For the past decade, Bickel & Brewer has represented hotel franchisors, management companies, owners, developers and investors in the highest profile litigation in the hospitality industry. He is a member of various philanthropic organizations, including the New York City Partnership and the Board of Trustees of Albany Law School. Mr. Brewer III can be contacted at 214-653-4811 or wab@bickelbrewer.com Extended Bio...

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