Keith Matthew Angle
February 14, 2012
On February 3, 2012, the United States District Court for the Southern District of New York, in Pippins v. KPMG, No. 11 Civ. 377(S.D.N.Y. Feb.3, 2012) denied the defendant's motion to set aside a decision by the Magistrate Judge to preserve thousands of hard drives of former and departing employees who might be potential plaintiffs in a wage and hour litigation. The Court also denied the defendant's request for a Protective Order regarding the same issue.
The original class action was brought on January 19, 2011, to recover overtime wages for Audit Associates. Plaintiffs allege that the defendant willfully misclassified its Audit Associates as exempt employees and failed to keep accurate records of hours worked; the defendant contends that the employees in question are administrative and/or professional, and therefore exempt from wage and hour requirements. Plaintiffs demanded the preservation of all hard drives for the former and departing Audit Associates who might potentially be part of either the collective or class action entitled to overtime. Plaintiffs claim that the drives could contain evidence of the hours worked and the types of job duties for each Audit Associate who might be a member of the class.
In the face of such a massive preservation demand, in August 2011 the defendant sought a protective order, allowing it to preserve only a random sample of 100 hard drives out of the thousands sought to be preserved by the plaintiffs—or, in the alternative, an order that the plaintiffs bear the preservation costs of any hard drives in excess of 100. Defendant argued that the preservation cost per drive was in the neighborhood of $600 each; that the total bill for preserving everything, $1,500,000, would be out of all proportion to the modest amounts in controversy; and that any relevant information the drives might contain could be gleaned from other sources and materials. Magistrate Judge Cott denied the motion. The Judge agreed with plaintiffs that the hard drives might contain unique, relevant information, and ordered the defendant to continue to preserve the drives, at least until the District Court issued its decision regarding class certification, at which time it could renew its request for a Protective Order.
The order was appealed to the District Court and included several arguments to avoid an obligation to preserve the former and departing Audit Associate hard drives. The District Court rejected each one. First, District Judge McMahon's understanding was that the parties had tried to negotiate a reasonable plan for sampling the drives to determine if they contained potentially relevant information. A discovery stay was in effect during this time while the Court reviewed the application for class certification, and the defendant determined it had no obligation to produce drives while the stay was in place. The court found that the defendant "unreasonably" took this position, even for the purpose of formulating searches to allow sampling to proceed. It appears that the defendant's refusal to allow the examination of hard drives during the negotiation of the appropriate preservation order colored the district court's thinking in a negative way, and Judge McMahon was critical of this perceived failure to cooperate. She also took both parties to task for failure to seek from the District Court a clarification of the scope of the discovery stay. The Court noted that "[h]ad I been contacted, I would have immediately ordered KPMG to produce a small number of hard drives so that Plaintiff's counsel could peruse them, and that would have been the end of the matter." Decision at 9.
Second, the Court found it disingenuous of the defendant to rely on a proportionality argument to limit its preservation obligations by claiming the costs and benefits of preservation had not been properly balanced by the Magistrate Judge since it withheld the information that was, in her estimation, essential to demonstrate the benefit side of that balancing. In order to establish that the hard drives contained little or no relevant information, the defendant should have produced several hard drives for analysis. Since it did not, she squarely places the blame for the costs to preserve the thousands of hard drives on the defendant itself. Of course, producing entire hard drives to an opponent has significant risks and challenges, including potential disclosure of potentially privileged, irrelevant, proprietary, or personal and private information, and the obligation to protect such information. However, an intermediate solution may have been possible, and the Court makes it clear the parties were expected to negotiate just that.
Third, and of significant import to counsel representing defendants in employment collective and class action cases such as this one, she dismissed the argument that only the named plaintiffs were key players and therefore only their hard drives should be preserved. The court states that "[a]ll parties are by definition "key players." Decision at 21. The defendant's assertion that only Audit Associates who are presently named as parties are "key" is "nonsense." Id. Citing to Zubulake IV, the court held that the defendant should "'reasonably anticipate' that every Audit Associate who will be receiving an opt-in notice is a potential plaintiff in the action." Id. Interestingly, Judge Schiendlin in her later Zubulake V decision re-defined "key players" as "the people identified in a party's initial disclosure and any subsequent supplementation thereto."
Judge McMahon ruled that the defendant "must preserve the hard drives—all of them, without exception, for all Audit Associates nationwide. . ." unless and until the sampling shows no relevant data is on the drives, or the opt-in period ends. Decision at 16. The Court apparently felt it had to choose considerations of full and complete discovery over those of economy because of the likelihood that there was "relevant information" buried in the hard drive data, and because costs and benefits could not be reliably compared due to the perceived recalcitrance of the party resisting discovery.
The ramifications of this opinion are significant for counsel involved in similar collective or class actions. Under the Pippins line of reasoning, a party arguably should preserve the data sources for every potential class member who might opt in to the claim until a) it can demonstrate (via sampling, for example) that the data sources of potential class members are unlikely to contain the relevant information claimed by its adversaries, or b) the opt-in period ends, at which time the data sources of those who did not opt in may no longer be subject to preservation (so long as there is no credible threat that the employee who failed to opt in will file an individual suit instead).
For large companies, this could result in huge preservation costs as the organizations scramble to avoid potential spoliation challenges. However, both Judge Cott and Judge McMahon's opinions endorse the use of sampling in preservation, and a reasonable sampling methodology – perhaps with more transparency from the producing party – may have succeeded in limiting the preservation obligation in Pippins. Moreover, Judge McMahon's opinion also supports the use of proportionality in preservation, which was an open question under Judge Cott's earlier decision.
To view the decision and order, click here.
 To view the decision and order, click here.
 Zubulake v UBS Warburg, 220 FRD 212, 218 (SDNY 2003) ("Zubulake IV")
 Zubulake v. UBS Warburg, 229 FRD 422, 433 (SDNY 2004) ("Second, counsel should communicate directly with the "key players" in the litigation, i.e., the people identified in a party's initial disclosure and any subsequent supplementation thereto.") (Zubulake V).
Keith Matthew Angle