The U.S. Supreme Court in Shute v. Carnival Cruise Lines, 499 U.S. 585 (1991) held the Shutes, who were injured on a Carnival Cruise ship in waters off Mexico, must file suit in Florida pursuant to the forum selection provision printed on the back of their ticket.   The Shutes filed suit in their home state of Washington.  The cruise ship departed from California.  Shute is still one of the most far reaching holdings enforcing adhesion-like forum selection provisions.  The Shutes also had a strong argument that they lacked notice of the forum selection/choice of law provisions.  

Listen up, all you internet users (which is basically everybody but my mother, who still views the Internet as the work of the devil, and will quote from the book of Revelation in support of her theory).  Three bills you need to be aware of, because they may change the way you view (or more correctly, the way you are allowed to view) the Internet.  and from what I’m reading, there are some pretty darned big sites and companies that are ready to either “go dark” in protest (Wikipedia, for example, which is where I do most of my legal research) or lend a big supporting hand to the protests of the current bills being considered (Google is one – who can live a day without Googling something?  I mean for cryin’ out loud the Company has made itself into a verb!!).  Those bills are:

The Consumer Product Safety Commission (CPSC) recently adopted a rule that requires children's products (products used by children twelve and under) to be tested by an authorized and independent third-party.  On October 19, 2011, the CPSC voted 3-2 along party lines to pass the rule.  The rule will likely take effect February 2013. 

Before this rule, it was the manufacturer's responsibility to test its products and ensure that they met all safety requirements before releasing them into the stream of commerce.  But by passing this rule, three CPSC Commissioners obviously felt that self-testing and market forces were insufficient to keep unsafe products away from children.  According to Chairman Inez Tenenbaum, the rule will fetter out unsafe children's products before they get in the hands of children.     

While consumer safety advocates see the rule as a much needed safety measure, manufacturers are not happy.  Not only will every new children's product have to be independently tested, but any design, manufacturing, or component change will require a product to be re-tested.  All of this testing will either require manufacturers to absorb extra costs, or pass them onto customers.  And in this economy, passing on costs to consumers can lead to fewer sales and hurt a manufacturer's bottom line. 

Whether or not the rule will actually improve the safety of children's products is yet to be determined.  But it is a foregone conclusion that manufacturers and consumers are footing the bill either way.    

William F. Auther is a partner with an active trial practice in product liability and business litigation and Kelly M. McInroy is an associate in the Phoenix office of Bowman and Brooke LLP.  

In the wild, wild west of the internet, it looks like the Federal Trade Commission is saddling up to play the role of sheriff. On November 29, 2011, the FTC announced its proposed settlement of claims against the social networking goliath, Facebook. (By the way, you can read about it on the Commission’s Facebook page. http://www.facebook.com/federaltradecommission?v=wall.) The settlement resolves an eight-count administrative complaint charging Facebook with misleading their users by telling them they would protect the privacy of personal information, but repeatedly allowing that information to be shared with third parties or made public without the users’ knowledge or consent.  (In the matter of Facebook, Inc., File no. 092 3188.) Coming on the heels of the FTC’s March 2011 settlement of charges that Google, Inc. violated its own privacy promises to consumers when it rolled out its social network site, Google Buzz (In the Matter of Google, Inc., File no. 102 3136), the Facebook case demonstrates the agency is willing to use consumer protection laws to “make sure companies live up to the privacy promises they make to American consumers.” http://ftc.gov/opa/2011/11/privacysettlement.shtm.)

Assume everything you write or e-mail an expert will be discoverable.  Even if you can somehow keep it from being discovered, you will probably spend your time and the client’s money to keep it confidential.  With that in mind, before you send anything to an expert ask yourself whether you would have a problem with the other side seeing it.  If so, think long and hard before sending it.  Also, folks have become too casual in what they include in e-mails, and I’ve found this true with experts, particularly their staff.  So try to avoid e-mailing experts and their offices whenever possible, sticking to phone calls and faxes when possible.  And ask them not to e-mail you.  Yes, it is less convenient, but it will help ensure that the experts don’t make errant comments that become part of their permanent file (which at some point will likely have to be produced to the other side).

With all of the controversy surrounding the recent WikiLeaks release of classified information, it is important for companies to keep in mind that even lawfully released documents can be damaging.  The Walt Disney Co. (“Disney”) learned this the hard way back in 2001, when a Los Angeles Superior Court Judge ordered the unsealing of tens of thousands of documents in the long running litigation between Disney and Stephen Slesinger, Inc. (the heirs to the U.S. rights to Winnie the Pooh) over licensing rights and a royalties dispute.  Particularly damaging to Disney was that included in the documents to be unsealed were two orders imposing sanctions against Disney for its conduct in the case (which included destroying thousands of documents after an instruction by the Court to preserve all evidence relating to the matter).  

While trade secret arguments are normally thought to be sufficient to seal documents in such cases, Courts are increasingly weighing such private interests against the public interest in knowing what is taking place in the court system.  However, several thousand other documents in the case remained under seal as they were protected by an earlier Confidentiality Agreement reached by the parties to cover documents exchanged in discovery.  Therefore, it would be wise for counsel to insist upon a confidentiality agreement covering all documents exchanged in discovery, even if the filings in the case are made under seal, in order to better protect your clients’ information.

http://www.american-reporter.com/3,995/2495.html

Rimkus Consulting Group, Inc. v. Cammarata, 2010 WL 645253 (S.D.Tex. February 19, 2010)

The Rimkus decision will likely prove to be one of the most important ediscovery decisions announced in 2010. The decision was written by Judge Lee H. Rosenthal, who chairs the Judicial Conference Committee on Rules of Practice and Procedure. It is a decision that merits the attention of any serious ediscovery practitioner.

The blogosphere has been all “a twitter” about Judge Shira Scheindlin’s recent opinion in Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 WL 184312 (S.D.N.Y. January 5, 2010). However, Rimkus may ultimately prove to have more lasting and widespread significance.

Pension Committee addressed when the failure to properly preserve and collect ESI justifies the sanction of an adverse inference instruction. In a recent blog post about the Pension Committee decision, we raised several concerns about the opinion’s analysis and conclusions. While Rimkus involved allegations of wilful misconduct, including the intentional destruction of emails and other ESI after a duty to preserve had been triggered, Judge Rosenthal noted that there were “some common analytical issues” between Rimkus and Pension Committee, which merited discussion. Judge Rosenthal’s discussion of those common analytical issues in Rimkus addressed several of the concerns we highlighted in our Pension Committee post.

Judge Rosenthal observed that the rules surrounding the duty to preserve ESI and spoliation are not controversial. However, she recognized that applying them “to determine when a duty to preserve arises in a particular case and the extent of that duty requires careful analysis of the specific facts and circumstances.” She then observed:

It can be difficult to draw bright-line distinctions between acceptable and unacceptable conduct in preserving information and in conducting discovery, either prospectively or with the benefit (and distortion) of hindsight. Whether preservation or discovery conduct is acceptable in a case depends on what is reasonable, and that in turn depends on whether what was done – or not done – was proportional to that case and consistent with clearly established applicable standards.

The Seventh Circuit’s Electronic Discovery Pilot Program recognizes that Rule 26(b)(2)(B)’s principle of proportionality applies to the duty to preserve ESI. Principle 2.04(a) of the Seventh Circuit’s Pilot Program provides that parties and their counsel “are responsible for taking reasonable and proportionate steps to preserve relevant ESI ‘within its possession custody or control.’” Judge Rosenthal endorses that approach to preservation efforts in Rimkus. She cites THE SEDONA PRINCIPLES: SECOND EDITION, BEST PRACTICES RECOMMENDATIONS & PRINCIPLES FOR ADDRESSING ELECTRONIC DOCUMENT PRODUCTION 17, cmt. 2.b. (2000), as support for her conclusion on this point. In that comment, the Sedona Principles explain “electronic discovery burdens should be proportional to the amount in controversy and the nature of the case. Otherwise, transaction costs due to electronic discovery will overwhelm the ability to resolve disputes fairly in litigation.”

Judge Rosenthal further recognized that applying a categorical approach to the issue of sanctions can be difficult for similar reasons. When determining if sanctions are warranted and the nature of any sanctions to be imposed “requires a court to consider both the spoliating parties’ culpability and the level of prejudice to the party seeking discovery.” In other words, a court’s response to the loss of ESI depends on both the degree of culpability involved and the extent of any prejudice that results. Even with the intentional destruction of potentially relevant information, if no prejudice to the opposing party results, that should influence the sanctions that are imposed. Judge Rosenthal also recognized that even with an inadvertent loss of ESI, severe prejudice to the opposing party will influence the appropriate response to a request for sanctions, assuming there is some degree of culpability involved.

As a result, even though the defendants in Rimkus intentionally destroyed ESI in bad faith and provided false testimony about the destruction of that evidence, Judge Rosenthal refused to impose terminating sanctions. She noted that between the information the defendants did produce and the records plaintiff obtained through the issuance of subpoenas to several internet service providers, plaintiff had extensive evidence to present at trial. While acknowledging that plaintiff had suffered some prejudice, it was far from irreparable, and the issuance of a terminating sanction (dismissal or a default judgment) is appropriate only if the spoliation of evidence results in “‘irreparable prejudice’ and no lesser sanction would suffice.” Judge Rosenthal did authorize the issuance of an adverse inference instruction, but unlike Pension Committee, the court made the preliminary findings necessary to submit the spoliation evidence and the adverse inference instruction to the jury.

Judge Rosenthal also noted that the Fifth, Seventh, Eighth, Tenth, Eleventh and D.C. Circuits all appear to require evidence of “bad faith” before an adverse inference instruction can issue. She further observed that while the First, Fourth and Ninth Circuits do not necessarily require bad faith if severe prejudice is demonstrated, decisions from those Circuits frequently emphasize bad faith. She further explained that in the Third Circuit, courts balance the level of fault against the resulting prejudice. Thus, Judge Rosenthal concluded that the circuit differences on the degree of culpability necessary to warrant the issuance of an adverse inference instruction, limits the applicability of the approach taken in Pension Committee. And, following the Supreme Court’s decision in Chambers v. NASCO, Inc., 501 U.S. 32, 43-46 (1991), something more than negligence may be required when sanctions are imposed under a district court’s inherent authority.

Intentional deletion of emails and ESI bars the application of issue and claim preclusion.

Several former employees left Rimkus to start their own competing company offering similar investigative and forensic engineering services. Shortly after the new startup company was formed, those former employees filed a declaratory judgment action in Louisiana claiming that the forum-election, choice-of-law, non-competition and non-solicitation provisions in the employment agreements they had signed with Rimkus were unenforceable. Subsequently, Rimkus sued those employees in two separate lawsuits in Texas (that were ultimately consolidated before Judge Rosenthal) alleging they breached the non-competition and non-solicitation covenants of their employment contracts and that they used trade secrets and proprietary information in setting up their competing company.

The former employees were successful in their Louisiana declaratory action. There the court concluded that the challenged provisions of the employment contracts were unenforceable under Louisiana law. In the subsequently filed Texas federal suits, the former employees argued that it should be dismissed based on the preclusive effect of the Louisiana state-court decision which invalidated the non-compete, non-solicitation, forum-election and choice-of-law provisions in the employment contracts. That motion was denied because even if those provisions were unenforceable in Louisiana under Louisiana law, that finding did not make them invalid in all states.

Subsequently however, in the Louisiana state-court action, Rimkus filed an answer and a “reconventional demand,” which is similar to a counterclaim, asserting claims for breach of the employment agreement, breach of fiduciary duty and disparagement, arguing those claims should be governed under Texas state law. The trial court in the Louisiana action granted summary judgment to the former employees on those claims, which set the stage for what came next. The former employees then moved for summary judgment in the Texas federal court action on the grounds of res judicata.

Judge Rosenthal denied that summary judgment motion based on the spoliation of evidence that had occurred. She noted that the Restatement (Second) of Judgments provides, “that fraud, concealment or misrepresentation provide a basis to depart from claim preclusion.” She explained: “Issue preclusion does not apply when one party ‘conceal[s] from the other information that would materially affect the outcome of the case.’ Restatement (Second) of Judgments, §28(f), cmt. j. As a result, after weighing the policies underlying the law of preclusion against the defendants spoliation of evidence relevant to Rimkus’ claims, Judge Rosenthal concluded that exceptional circumstances existed and ruled that neither issue nor claim preclusion could be applied.

The record on summary judgment clearly demonstrated that the defendants had not only deleted emails and other ESI after a duty to preserve had arose, they also delayed producing documents, which demonstrated that information had been taken from Rimkus that was used in setting up the competing company. The defendants also provided incomplete information about their discovery efforts, which would have revealed the spoliation. Because none of the destroyed evidence was available to Rimkus during the course of the Louisiana action, Judge Rosenthal concluded that Rimkus did not have a full and fair opportunity to litigate the misappropriation, breach of fiduciary duty, and disparagement claims in the Louisiana lawsuit.

Rule 37(e)’s “safe harbor” provision was inapplicable.

Judge Rosenthal concluded that a duty to preserve was triggered no later than “when the defendants were about to ‘preemptively’ sue Rimkus” in the Louisiana state-court action. At that point, the defendants had an obligation to preserve documents and information, including ESI, relevant to the dispute with their former employer.

Fed. R. Civ. P. 37(e) precludes the imposition of sanctions where the loss of information results from the routine operation of a party’s computer system, when operated in good faith. The court concluded that Rule 37(e) was inapplicable in Rimkus. One of the former employees testified that he and the others decided on a “policy” of deleting emails more than two weeks old. Such a policy, which was put into place after a duty to preserve had arisen, did not constitute the “routine, good-faith operation of a computer system,” thereby vitiating Rule 37(e)’s protection. Additionally, information presented to the court established that the defendants selectively deleted emails that would have disclosed their activities, which further precluded the potential application of Rule 37(e).

The SEC recently announced the standards for it's new initiative to encourage and reward cooperation by individuals. The link to the SEC explanation of the standards is:

http://www.sec.gov/spotlight/enfcoopinitiative.shtml

These guidelines confirm the SEC's previously stated intention to encourage cooperation in SEC investigations through a variety of methods, including cooperation agreements, which for the first time will provide for the prospect of reduced sanctions based on the nature of an individual's cooperation. The guidelines include the following criterion: "whether the individual provided non-privileged information, which information was not requested by the staff or otherwise might have been discovered."

Parties and third parties alike should pay careful attention to the terms of a discovery stipulation. Courts are likely to strictly uphold the terms of a stipulation, even if doing so would result in a party or third party having to go to great expense in order to comply with a discovery request. Parties and third parties should also strive toward timely compliance with case management orders, as well as comprehensive identification of sources of potentially relevant ESI, keeping in mind that even a good faith failure to comply could result in sanctions.

In re Fannie Mae Sec. Litig., 552 F.3d 814 (D.C. Cir. 2009):

D.C. Cir. affirmed district court’s decision in this case, where defendants sought production of documents from a third party (“OFHEO”). After OFHEO produced what it represented were “all” of its responsive documents, defendants learned that OFHEO did not search its off-site backup tapes. OFHEO voluntarily agreed to search the backup tapes, and entered into a stipulation by which defendants would set the search terms. Upon finding that the search terms resulted in 660,000 documents, OFHEO objected, but the court ordered the production of all the documents finding that the stipulation clearly granted defendants sole discretion over the terms. OFHEO took steps to comply, and went to great expense (9% of its total budget), but repeatedly requested last minute extensions of time. Court noted OFHEO’s good faith, but late attempts to comply, and ordered immediate production of all documents withheld on the sole basis of pending privilege review, although such production would not constitute a waiver of privilege. Moreover, the D.C. Cir. upheld the district court’s holding OFHEO in contempt for its delay and conduct during discovery.

A detailed summary of this case is available here.