2009
Delaware Chancery Court Addresses E-Discovery

The Delaware Court of Chancery issued four decisions in late May and early June clarifying the procedural rules in Delaware courts that govern the discovery of electronically stored information. The chancery court has no procedural rules that specifically govern electronic discovery (ediscovery). Instead, e-discovery is governed by the general rules of civil procedure for the Delaware Court of Chancery.1 Kevin Brady, a member of the Court of Chancery Rules Committee, has noted that the lack of specific e-discovery rules allows judges flexibility to “adapt the rules when cases involving pending business deals need to move quickly through the docket.”2 However, it also creates a situation in which “the court’s e-discovery case law has more impact on practice.”3 Accordingly, the court’s recent decisions are likely to encourage companies that anticipate litigation involving e-discovery to alter their business practices in order to comply with the law. Further, because many corporations are chartered in Delaware and may be likely to face litigation there, these decisions will have an impact on companies whose principle place of business is located outside the state.
The Delaware chancery court’s civil procedure rules establish a broad scope of discovery. According to the Rules of the Court of Chancery of the State of Delaware, “[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action.”4 Also, the rules establish that “[i]t is not a ground for objection that the information sought will be inadmissible at the trial if the information sought appears to be reasonably calculated to lead to the discovery of admissible evidence.”5
Two of the court’s recent decisions discussed parties’ motions to compel the production of discoverable material. The other two discussed litigants’ duty to preserve discoverable material from spoliation and sanctions against spoliators.
I. Motions to Compel the Production of Discoverable Material
The chancery court’s civil procedure rules allow litigants to motion for the court to compel the production of discoverable material.6 Omnicare, Inc. v. Mariner Health Care Mgmt. Co.7 involved a billing dispute between the plaintiff, Omnicare, Inc., a pharmaceutical supplier, and the defendant, Mariner Health Care Management, a nursing home operator. Both litigants moved to compel discovery of the vast amount of material relevant to the case. Omnicare’s motion to compel involved two e-discovery issues: (1) whether the defendant was required to restore and produce, at its expense, “backup tapes” containing information relevant to the litigation which was no longer available in e-mail form due to the defendant’s automatic deletion program, and (2) whether the parties were bound to comply with an agreement they had formed prior to filing their crossmotions to compel, the Stipulation Regarding Electronic Discovery and Document Production (or “E-Discovery Stipulation”), even though that agreement had not been fully negotiated.8
The court refused to shift the cost of restoring and producing the backup tapes to the plaintiff. It cited a U.S. Supreme Court case establishing that “[g]enerally, the responding party bears the expenses associated with complying with a discovery request,”9 but noted that the chancery court reserved the power to alter this general rule when appropriate.10 The court reasoned that, even though it would be burdensome on the defendant to restore the backup tapes, the defendant had failed to prove that deletion of data from “active stores” had rendered it “not reasonably accessible.”11 The court noted, however, that the defendant should first produce information from its “active stores,” which would indicate whether or not restoring the backup tapes would yield material relevant to the dispute.12
The court also held that the parties should resolve issues relating to the production and discovery of electronically stored information according to the “E-Discovery Stipulation” to the extent that the parties had fully negotiated the agreement. Issues not fully negotiated in the agreement should be heard by a neutral third party skilled in deciding technical questions of this nature.13
In Grace Bros., Ltd. v. Siena Holdings, Inc.,14 the court addressed the question of whether the plaintiff could compel discovery of e-mails exchanged between members of the defendant corporation’s board of directors relating to a 2003 corporate restructuring plan that allegedly violated a Delaware statute. The plaintiff had fi led its complaint in 2004, and its first request for the production of documents included a request for the production of the e-mails. Th e defendant, by questioning board members about their “document retention and email communication practices” and turning over “sender-side versions” of the relevant e-mails” determined that it was unnecessary for board members to search their electronic records to produce relevant material.15 The plaintiff filed a motion to compel production of the e-mails in May 2009.
The court granted the plaintiff’s motion, compelling defendants to produce e-mails that were “reasonably related to Grace’s prior requests.”16 It cited one of its earlier decisions establishing that “[t]he burden is on the objecting party to show that the information sought is privileged or improperly requested.”17 According to its civil procedure rules, the court should limit discovery if “the discovery sought is unreasonably cumulative or duplicative,” or if it can be obtained from a “source that is more convenient, less burdensome, or less expensive.”18 The court held that the defendant had not met this burden because it had failed to show that the request was “fully duplicative” or “intended to harass Siena.”19 Further, although complying with the discovery request would be somewhat burdensome on the defendant, the court held that producing the e-mails would not be “overly burdensome.”20
II. Duty to Preserve Discoverable Material from Spoliation and Available Sanctions
Triton Constr. Co., Inc. v. E. Shore Elec. Servs., Inc.21 addressed the issue of a defendant’s duty to preserve electronically stored information in anticipation of litigation and sanctions for spoliation. The case involved a dispute between the plaintiff Triton Construction Co., an electrical contractor, and the defendants Tom Kirk, a former employee of Triton, and Eastern Shore Electrical Services, Inc., Kirk’s new employer. While employed at Triton, Kirk had kept information relevant to this dispute on a desktop computer at work.22 In July 2007, shortly before Kirk stopped working at Triton on August 31, 2007, Triton employees made a “ghost copy” of Kirk’s hard drive, in part “because Kirk recently had been implicated in an incident where wire went missing from a job site.”23 Shortly after Kirk left Triton, it was discovered that Triton and Eastern had submitted identical bids for a project.24 When the “ghost copy” of Kirk’s hard drive was restored to investigate this matter, however, an expert discovered that Kirk had installed a “wiping program on the computer that targeted specific files for overwriting, making the files irretrievable.”25 Triton filed a complaint in October 2007, alleging that Kirk had breached his fiduciary duties and that his new employers had aided and abetted Kirk’s breach of duties and had misappropriated Triton’s trade secrets.26
The court noted that “[a]n affirmative duty to preserve evidence attaches upon the discovery of facts and circumstances that would lead to a conclusion that litigation is imminent or should otherwise be expected.”27 Emphasizing that this duty can arise even before the commencement of the litigation, the court held that Kirk had violated his duty to preserve discoverable materials. He knew that “litigation was imminent or otherwise to be expected” probably after the incident with the missing wire, and certainly after he ceased working for Triton.28 As to the remedy, the court noted that “Delaware courts may draw adverse inferences against a party or impose other sanctions for intentional or reckless destruction of evidence.”29 It held that Kirk had at least “recklessly,” and probably “intentionally,” “destroyed or failed to preserve evidence relating to this litigation,” and that it would draw an adverse inference “that the missing information would have supported Triton’s position on any issue to which that information was relevant.”30
The court again addressed the duty to preserve discoverable material and sanctions for spoliation in Beard Research, Inc. v. Kates.31 A dispute arose between the plaintiffs, Beard Research, Inc. (BR), and CB Research & Development, Inc. (CB), two providers of chemistry outsourcing services, and the defendants Michael Kates, a former BR and CB employee, and Kates’s new employers.32 While still employed at BR and CB, Kates purchased a laptop to be used for “for business purposes.”33 After Kates ceased working for BR and CB, he continued to use the laptop when working for his new employers. In May 2005, BR and CB filed a complaint against the defendants.34 On several occasions following the filing of the complaint, information was deleted from Kates’s computer, sometimes intentionally and sometimes due to computer crashes.35 In October 2008, BR and CB filed a motion for sanctions for spoliation of evidence against the defendants, requesting default judgment in their favor or, alternatively, an adverse inference in their favor.36
Citing its decision earlier that month in Triton Construction Co., the court asserted that “a party in litigation or who has reason to anticipate litigation has a duty to preserve evidence that might be relevant to the issues in the lawsuit.”37 The court held that the defendants had a duty to preserve the evidence because they had a reason to know as early as when Kates resigned from BR and CB in 2004 and 2003 respectively that Kates’s work laptop might contain information relevant to future litigation.38
As for the remedy, the court asserted that “[a] court may sanction a party who breaches this duty by destroying relevant evidence or by failing to prevent the destruction of such evidence.”39 It held that the defendants had breached their duty to preserve evidence on three occasions and therefore sanctions were appropriate.40 The court denied the plaintiffs’ request to enter a default judgment against the defendants because such a remedy is appropriate “only if no other sanction would be more appropriate under the circumstances.”41 However, it granted the plaintiffs’ motion for an adverse inference against the defendants because Kates’s violation of his duty to preserve had been intentional.42
III. Potential Effects of These Decisions
Read in conjunction, these four decisions illustrate principles that are likely to be influential for Delaware courts, as well as parties who anticipate litigating in these forums. First, these decisions indicate that the chancery court is willing to compel discovery of electronically stored information even when it imposes a signifi cant burden on the producing party. In Omnicare, Inc., the court argued that “voluminous discovery may be necessary in order for the merits of a given controversy to be addressed fairly. Our rules of discovery are liberal, and are based on the notion that, in the end, fulsome discovery is more likely to result in accurate fact-finding.”43 Second, the court indicated its willingness, at least under some circumstances, to hold employers accountable for employees’ spoliation even if the employers’ behavior would not have been sufficiently culpable to hold them liable on their own.44
Critics might contend that the court’s broad interpretation of litigants’ duty to preserve potentially relevant data creates an incentive structure that encourages parties to over-preserve data which might be relevant to some litigation, whether it is pending or far in the future. However, the Omnicare, Inc. decision suggests that parties may be able to minimize this potential inefficiency by forming agreements in the early stages of litigation which define their responsibilities to preserve electronically stored information.45 The court’s decision in Beard Research, Inc. expressed a similar sentiment: “To the extent counsel reach agreements recognizing and permitting routine estruction of certain types of files to continue during litigation, the Court has no reason to object.”46
Some practitioners have said that the court’s recent e-discovery decisions should encourage potential litigants to diligently preserve electronically stored information in anticipation of litigation. Jim S. Green Sr., a lawyer who represented defendant Eastern Shore Electrical Services, Inc., in Triton Construction Co., advised “[i]f you’re counsel for any party, you have to get right on the horn when litigation starts or litigation is contemplated and instruct your client in no uncertain terms that everything needs to be preserved.” He asserted “I would go so far as if to say, if you have a document retention policy that involves deleting e-mails, prudence would dictate that litigation override that policy.”47
* Shauna Peterson is a student at the University of Chicago Law School (J.D., anticipated 2011).
Endnotes
1 Rules of the Court of Chancery of the State of Delaware, available at http://courts.delaware.gov/Rules/?chanceryrules.pdf (last visited July 9, 2009).
2 Sheri Qualters, Law.com, Delaware Chancery Homes in on EDD, June 16, 2009, available at http://www.law.com/jsp/legaltechnology/ pubArticleLT.jsp?id=1202431475006 (last visited July 9, 2009).
3 Id.
4 Del. Ch. Ct. R. 26(b)(1).
5 Id.
6 Del. Ch. Ct. R. 37(a) (“A party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order compelling discovery.”).
7 No. 3087-VCN, 2009 WL 1515609 (Del. Ch. May 29, 2009).
8 Id. at *3.
9 Id. at *7 (citing Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978)).
10 Omnicare, Inc., 2009 WL 1515609, at*7.
11 Id. at*7.
12 Id. at*7.
13 Id. at *8.
14 No. 184-CC, 2009 WL 1547821 (Del. Ch. June 2, 2009).
15 Id. at *1.
16 Id. at *2.
17 Id. at *1 (citing Van de Walle v. Unimation, Inc., No. 7046, 1984 WL 8270, at *2 (Del. Ch. October 15, 1984)).
18 Del. Ch. Ct. R. 26(b)(1).
19 Grace Bros., Ltd., 2009 WL 1547821, at *1.
20 Id. at *1.
21 No. 3290-VCP, 2009 WL 1387115 (Del. Ch. May 18, 2009).
22 Id. at *7.
23 Id.
24 Id.
25 Id.
26 Id. at *1.
27 Id. at *7 (citing Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 550 (Del. 2006)).
28 Triton Constr. Co., 2009 WL 1387115, at *7.
29 Id. at *7.
30 Id. at *8.
31 No. 1316-VCP, 2009 WL 1515625 (Del. Ch. May 29, 2009).
32 Id. at *1.
33 Id. at *1.
34 Id. at *2.
35 Id. at *2-3.
36 Id. at *4.
37 Id. at *5 (citing Triton Constr. Co., 2009 WL 1387115).
38 Beard Research, Inc., 2009 WL 1515625, at *5.
39 Id. at *5 (citing Triton Constr. Co., 2009 WL 1387115, at *8).
40 Beard Research, Inc., 2009 WL 1515625, at *6-9.
41 Id. at *10 (quoting Sundar Elec., Inc. v. E.J.T. Constr., 337 A.2d 651, 652 (Del. 1975)).
42 Beard Research, Inc., 2009 WL 1515625at *11-12 & n.93.
43 Id. at *1.
44 Id. at *12 & n.93 (“Whether or not the action or inaction of ASDI and ASG are considered reckless... , I see no inequity in having this adverse inference aff ect ASDI and ASG, as well as Kates.”).
45 Omnicare, Inc., 2009 WL 1515609, at *8.
46 Beard Research, Inc., 2009 WL 1515625, at *7.
47 Sheri Qualters, Law.com, Delaware Chancery Homes in on EDD, June 16, 2009, available at http://www.law.com/jsp/legaltechnology/ pubArticleLT.jsp?id=1202431475006 (last visited July 9, 2009).
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