Wednesday, June 16, 2010

Allocating the Cost of Electronic Discovery In Competition Cases (Genworth Financial v. McMullan)

Electronic discovery is the new frontier in unfair competition cases. Many times, employers will be able to obtain evidence that departing employees e-mailed to themselves clearly proprietary customer lists or downloaded information to a flash drive prior to departing. This conduct raises a host of issues, including potential liability under the Computer Fraud and Abuse Act.

The question courts have struggled with is how to allocate the cost of electronic discovery, as forensic imaging and data recovery expenses can be extraordinary in terms of absolute dollars. There are a number of approaches courts can take, but the presumption under the Federal Rules of Civil Procedure is that the responding party must bear the expense of complying with discovery requests.

Magistrate Judge Grimm has determined that Rule 26 actually guides courts in balancing the factors to determine who should bear the cost of e-discovery. Among the factors to be considered:

(1) whether the discovery sought is cumulative;
(2) whether the discovery sought is obtainable from another reliable source;
(3) whether the requesting party already has had an opportunity to obtain the information;
(4) whether the burden of discovery outweighs its potential benefit.

Several other courts have outlined other factors to consider as well, with some evaluating total costs of production and the importance of the information.

In cases where the departing employees have not preserved evidence or have taken active steps to delete information, courts have the ability to step in and appoint a third-party forensic expert. The question of cost-shifting becomes more nuanced in those situations, and courts again have to weigh factors in assessing which party bears the burden of expense.

A good example of this is the recent case of Genworth Financial v. McMullan. In that case, former employees left Genworth Financial and established a rival entity. The defendants apparently took copies of the plaintiff's ACT database (full of client information) prior to their staggered departures.

After Genworth sued, it noted that certain information it expected to receive in discovery was not provided. Genworth sought some assurances from the defendants that information was being preserved, so that temporary and inactive files were not being deleted or overwritten. The defendants' counsel indicated that they had no intention of imaging the hard-drives. Genworth then filed a motion to have the court appoint a neutral expert to mirror-image the defendants' computers and media devices.

The court granted the motion with relative ease, particularly given the evidence that certain of the defendants in fact transmitted valuable Genworth information to his home computer. Of more importance to the court was one defendant's admission that he discarded the computer hard-drive after receiving a litigation hold letter from Genworth's counsel - clear evidence that he intentionally spoliated evidence. Finally, the court noted that the defendants' transmission of client information to their home computers was not isolated; an overwhelming amount of valuable data was in fact sent.

Accordingly, the court found a sufficient nexus between the trade secrets claim and the computers at issue to justify appointment of a mirror-imaging expert. The protocol for such imaging followed a three-step process. The expert had to (1) image of the computers; (2) recover deleted data and organize the same into a reasonable searchable form; and (3) allow defendants' counsel to examine the data for privilege and responsiveness.

The cost allocation was addressed last. Given defendants' culpability and spoliation of evidence, it had to bear 80 percent of the neutral expert's recovery cost, while the plaintiff had to pay for the remaining 20 percent. The court also awarded the plaintiff recovery of its attorneys' fees.

The takeaways from this case are numerous, but here are three important points to remember:

(1) Spoliation or failure to preserve evidence once under a duty imposed by law can be costly and lead to sanctions;
(2) Courts have discretion to involve neutral experts to manage certain aspects of e-discovery, particularly if the responding party has been obstinate or uncooperative; and
(3) Allocation of the costs of e-discovery, even in the face of clear spoliation, is not subject to any formula and varies widely from case to case, with the requesting party likely to bear some expense regardless of the responding party's culpability.


Court: United States District Court for the District of Connecticut
Opinion Date: 6/1/10
Cite: Genworth Financial Wealth Mgmt., Inc. v. McMullan, 267 F.R.D. 443 (D. Conn. 2010)
Favors: Employer
Law: Federal Rules of Civil Procedure

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