Amateur Hour Is Over! DR Distributors LLC Offers Crash Course on the Importance of E-Discovery Compliance

In DR Distributors, LLC v. 21 Century Smoking, Inc., et al., United States District Judge Iain D. Johnston issued a scathing 256-page opinion, dropping the proverbial hammer on the defendant and its counsel for repeated and egregious e-discovery failures – a veritable Keystone Kops series of discovery errors and misrepresentations spanning several years. The court imposed sanctions pursuant to Federal Rules of Civil Procedure 26(g) and 37, as well as monetary sanctions, and required the defendants’ former counsel to participate in continuing legal education on electronically stored information (ESI). In sum, Judge Johnston put all attorneys on notice that it “is no longer amateur hour” for attorneys grappling with e-discovery – compliance is not merely “best practices,” but required under the Rules, and courts will address incompetence accordingly.

The dispute arose from alleged trademark infringement claims involving electronic cigarettes with confusingly similar marks. The case was initiated in 2012 and assigned to Judge Johnston in 2014, who immediately held a case management conference. At this conference, the court asked counsel if litigation holds were issued, and defense counsel neglected to inform the court that no litigation holds had been issued at that point. Defense counsel also affirmatively stated that the defendant, Brent Duke, the principal of 21 Century Smoking, was generally knowledgeable about ESI, including “metadata and native applications.”

Despite defense counsel’s assurances to the court, little was done to comply with ESI obligations from early on in the litigation. In late 2012, Mr. Duke met with his attorneys to prepare initial disclosures, and he explained that he used two e-mail accounts, hosted by Yahoo! and GoDaddy, and used chat applications for both business and personal purposes. According to his former defense counsel, Mr. Duke’s attorneys orally advised him to preserve potentially relevant e-mails from these accounts, but did not issue a written litigation hold or provide any instruction with respect to disabling the automatic deletion function for e-mail or chats. Moreover, former defense counsel mistakenly believed – in part based on their client’s erroneous representations – that they could obtain all of Mr. Duke’s relevant e-mails from the defendants’ corporate e-mail servers; however, most of the relevant e-mails and chats were web-based and stored only in the cloud. Former defense counsel also allowed Mr. Duke to self-collect relevant e-mail communications and did not provide any supervision whatsoever over the collection process. It was not until after the close of fact discovery in 2015 that the defendants reengaged an ESI vendor, who found more than 15,000 previously uncollected, unproduced responsive documents. However, the defendants were unable to recover potentially responsive communications that were permanently deleted.

The plaintiff moved for sanctions relating to the failure to timely produce ESI and for the spoliation of ESI, and requested a “full arsenal of sanctions weapons,” including civil contempt, inherent authority, 28 U.S.C. § 1927, and Federal Rules of Civil Procedure 11, 26(g), 37 and 56(h). The plaintiff urged the court to impose the “nuclear options” of defaulting the defendants and dismissing their counterclaims. The court was extremely alarmed at former defense counsel’s apparent incompetence with respect to ESI, mistakes in properly advising his client regarding ESI collection and retention, and misrepresentations to the court. It took the opportunity to draft what amounts to a treatise on the history of spoliation and e-discovery in the courts, including a detailed exposition on the many pitfalls and serious consequences for unwary, incompetent, or simply uninterested counsel. Specifically, the court admonished former defense counsel for claiming that ESI was “unimportant” in a trademark case, failing to issue a litigation hold, leaving Mr. Duke to engage in self-collection of ESI without any oversight, failing to timely disclose relevant ESI, and overall lacking in candor to the court regarding their collective ESI failures. Counsel’s arguments with respect to these failures perplexed the court, spurring questions regarding Mr. Duke’s and his attorneys’ credibility and competence. For instance, the court described the defendants’ position that a “written litigation hold was not necessary for Duke to understand his preservation duties” as “patently wrong.” The court also observed that former defense counsel were “never concerned” about issues related to self-collection, after detailing the numerous pitfalls inherent to this process, and noted that “nothing is to be gained and much is to be lost when counsel blindly rely on a client to self-collect after an inadequate litigation hold and insufficient inquiry into the adequacy of the client’s search.” Ultimately, the court concluded that it was counsel’s “failure to take reasonable steps – indeed, almost any steps” after the ESI disclosure problems that served as the primary basis for imposing sanctions.

Based on the court’s findings (made with the benefit of five days of evidentiary hearings, review of voluminous documents in evidence, testimony, and hundreds of pages of briefing), the court imposed sanctions as follows: requiring the defendants to conduct a reasonable search for all responsive ESI and produce same to the plaintiff; barring the defendants from using any information not disclosed to the plaintiff; barring the defendants from using certain other evidence, including expert testimony; imposing certain issue preclusion sanctions; giving instructions to the jury regarding the nature and extent of the spoliation; requiring payment of the plaintiff’s reasonable attorneys’ fees related to the motion for sanctions and “derailed” summary judgment motion, which was “likely to exceed seven figures,” to be made by two of the defendants’ former lawyers; and requiring former defense counsel to complete continuing legal education on ESI. In imposing these sanctions, the court made clear that it did not expect “perfection,” but rather “expects – and the rules require – a reasonable understanding of ESI and the law relating to identifying, preserving, collecting and producing ESI, in addition to good faith compliance by the parties and counsel.”

Judge Johnston’s decision is a must-read for all litigators and serves as a strong directive to attorneys that a proclaimed lack of familiarity with e-discovery will not be treated leniently; in fact, incompetence regarding the technical aspects of ESI can rise to the level of non-compliance with the Federal Rules of Civil Procedure and an attorneys’ ethical duty of competence, as outlined in ABA Model Rule 1.1 and state specific Rules of Professional Conduct. We anticipate that this decision will have a lasting impact for many years to come.