Default Judgment Entered As a Sanction for Spoliation and Deliberate Withholding of ESI

MeccaTech, Inc. v. Kiser, 2008 WL 6010937 (D. Neb. April 2, 2008)

You know things are bad when the lawyers withdraw. In MeccaTech (MTI), the magistrate judge observed: “Misconduct of this magnitude is a rare occurrence.” It was determined through discovery that one of the defendants employed a consultant to intentionally erase items from his computer before he left MTI’s employment in attempt to shield his activities from discovery. Another instructed his co-defendants to make sure that all emails were on a platform to which MTI did not have access. The defendants, in response to MTI’s discovery requests, also claimed that there was no responsive information prior to February of 2005. However, ESI recovered from a discarded hard drive of one of the defendant’s computers established that the defendants were actively working on strategies to transfer business from MTI during that time frame.

The magistrate judge concluded that the failure to impose severe sanctions on the defendants “would only serve to reward their obvious disrespect for the judicial process and encourage others to engage in the same conduct.” Therefore, the magistrate recommended the entry of a default judgment against one defendant, that three other defendants should be precluded from defending the plaintiff’s claims of breach of duty and fraud, that the documents recovered from one of the defendant’s hard drives should be admissible in evidence, and that the facts contained therein should be considered established for purposes of the pending action. On April 23, 2009, the district court adopted the magistrate’s report and recommendations, and entered the proposed sanctions except as to one defendant, who in the interim had reached a settlement with MTI.

While MTI is notable for the sanctions that were imposed, the decision brings into focus the reality that where a client refuses to follow an attorney’s advice on the preservation or production of ESI, that attorney should carefully evaluate whether to withdraw from the engagement, and the potential for adversity that can occur when the attorney and client disagree on preservation and production issues.

MTI is in the business of assisting school districts comply with Medicaid rules and regulations as well as helping school districts recover money under Medicaid. At one time it had contracts with 180 school districts in Nebraska to provide Medicaid reimbursement and regulatory compliance services.

In February 2004, Gary Lange, the former CEO and president of MTI left the company, subject to a one year non-compete agreement. However, he began providing “marketing” services to a competitor, Strategic Governmental Solutions (SGS), before the term of the non-compete agreement expired. After Mr. Lange’s departure from MTI, what transpired can best be described as a mutiny by several of MTI’s employees. While they were still employed by MTI, those employees essentially induced school districts to not renew their contracts with MTI, and enter into new Medicaid service contracts with SGS. Several of those MTI employees subsequently went to work for SGS. As you might expect, MTI filed suit claiming tortious inference, civil conspiracy, RICO, fraud, and breach of the duty of loyalty by the defendants, several of whom were now their former employees.

Initially after MTI requested discovery from the defendants, they refused to produce any of the requested ESI or emails which pre-dated February of 2005, arguing that such information was not relevant to the parties’ claims and/or defenses. February, 2005 happened to correspond with when Mr. Lange’s non-compete agreement expired. MTI filed a motion to compel the pre-February 2005 discovery, which was granted. The SGS defendants then claimed that they produced everything which they were able to find via their search methodologies. However, when several former MTI employees were deposed, they testified that no one asked them to search their computers for information responsive to any of MTI’s discovery requests.

Mr. Lange claimed he could not produce any documents predating February, 2005 because his hard drive had crashed. However, the individual who determined that Mr. Lange’s hard drive could not be repaired failed to discard it. As a result, MTI was able to recover the hard drive, and a forensic examination recovered a treasure trove of damning ESI. Information was found on the Lange hard drive which contradicted the defendants’ sworn deposition testimony that they had never met prior to February, 2005 or discussed plans to transfer MTI’s Medicaid business. Also discovered was a letter, drafted by one of the former employee defendants while he was still employed by the company, that could be sent to Nebraska school districts for use in terminating their contracts with MTI. One of the recovered emails discussed a “transition” to SGS. An opinion letter was also recovered which confirmed that the defendants had sought legal advice in March, 2005 regarding the termination of MTI’s contracts with school districts.

None of this information was ever produced in discovery, and none of the defendants acknowledged the existence of the information or the events described therein in their discovery responses or depositions. This should come as no surprise because an email from one of the defendants was recovered which instructed his co-defendants to “erase all e-mails, contacts, etc., between any of us” from their MTI computers because “you [n]ever know when MTI might ask for your computer.” When they resigned from MTI, several of these employees did not immediately return their company computers as requested. Rather, the computers were recovered only after those employees first copied information onto disks, and then deleted the information from the computers.

It should come as no surprise, that in light of that abbreviated history noted above, the magistrate judge observed: “Misconduct of this magnitude is a rare occurrence in this court.” The sanctions that were imposed, which included the entry of a default judgment against one defendant and precluding several other defendants from defending claims brought against them, was completely warranted under the circumstances.

One point that was not discussed in the decision, was that during the course of discovery, the attorney representing SGS and several of the former MTI employees withdrew from the case. The basis of the attorney’s motion to withdraw was that a conflict prohibited by Rule 1.7 of the Rules of Professional Conduct had only recently come to light.

Potential Adversity to the Clients’ Interest

One ediscovery issue that has not garnered much discussion is the increased potential for adversity that decisions such as Zubulake have generated. The filing of a motion for sanctions for spoliation of ESI triggers the potential for adversity between the attorney and his client. In those instances where the attorney and client agree that one of them is at fault, and more importantly agree on which one it is, the attorney can continue to represent the client. However, where the attorney and the client disagree on who is at fault, what steps were taken to preserve and/or produce ediscovery or as to what advice or instructions were given, the potential for adversity has ripened, and triggers a duty on the part of the attorney to take those steps required of an attorney having a conflict of interest.

However, consideration of the adversity issue should occur long before any motion for sanctions is filed. When the attorney and client disagree over what steps should be taken to preserve ESI or disagree over what ESI should be produced in discovery, the attorney should carefully evaluate the need to withdraw from that engagement or the desirability of continuing the engagement even if withdrawal is not mandated. And from a risk management perspective, counsel should be documenting his instructions and advice to the client concerning the preservation and production of ESI.