e-Discovery lessons from KPMG Hard Drive Preservation Order

Facing a class action lawsuit regarding wages and hours is an employers’ worst nightmare.  A recent court ruling by the U.S. District Court for the Southern District of New York now gives employers even more reasons to be concerned.

lessons learned in project management resized 600In 2011, two former auditors sued KPMG, claiming they weren’t properly paid for the overtime hours worked. The lawsuit claims the plaintiffs violated the Fair Labor Standards Act and the New York State labor law. More than 7,500 potential plaintiffs are involved in the FLSA claims, while more than 1,500 plaintiffs are involved in the New York State labor claims. During the progression of the case, both parties discussed discovery, including proper data preservation and electronically stored information issues. KPMG preserved information that was needed for the lawsuit, including the plaintiffs’ time records and payroll records.  

When KPMG was unable to reach an agreement regarding discovery problems, the company filed a protective order requesting the court’s permission to preserve only 100 hard drives, or to offset the expense of preserving any additional drives by shifting the cost to the plaintiff. The federal magistrate who oversaw discovery ordered KPMG to preserve the hard drives belonging to every potential class member, which totaled more than 2,500 drives. This includes individuals who were no longer working with the firm during the time of litigation.

KPMG’s lawyers advised that the company will end up spending more money than the plaintiffs’ claims are requesting if they are ordered to store the entire amount drives.  The cost of maintaining such a substantial amount of information could possibly force the defendant to settle instead of going further with the case.  The United States District Court for the Southern District of New York released a ruling in response to the motion made by KPMG to reduce its obligations and the motion was dismissed without prejudice. The accounting firm appealed the court’s decision, which was unfortunately denied.

Electronic discovery (e-discovery) deals with the exchange of electronic information during civil litigation, and can involve a variety of people; including lawyers, forensic accountants, IT managers and other professionals.  Depending on the capabilities of the file formats used to store data, the amount of storage space needed can easily become excessive when multiple files and various formats exists. Companies need to practice effective strategies for deployment and storage in order to reduce costs.

Since attorneys involved in litigating these types of cases may not understand the policies and procedures that exist within a company’s IT infrastructure, necessary data could easily be destroyed by IT technicians if they are unaware that a legal hold has been placed on any records. Seeking expert advice from experienced professionals can result in additional costs when transitioning existing technologies, in order to accommodate any data that is being collected. Recognizing that significantly small upfront investments on ediscovery will save money overall, such as purchasing software tools, will aid in lowering ediscovery costs as well as litigation costs.

Although the fallout from the KPMG order remains to be seen, other companies easily serve as an example to the importance of electronic evidence preparation. One case that provides insight into the dangers of repeated ediscovery violations and defiance of court orders is Victor Stanley Inc v. Creative Pipe, Inc. The CEO of Creative Pipe Inc, Mark Pappas, violated a court order requiring the preservation of electronic evidence.  

Over a five year span during litigation, Mark Pappas deleted emails, deleted evidence from computers’ hard drives, and replaced the server used by the company. U.S. Magistrate Judge Paul W. Grimm handled the claims of electronic data destruction, and as a result, Mark was threatened with doing time in jail. The court also imposed over $1 million in sanctions to his organization. Additionally, a default judgment was entered against Creative Pipe Inc.

 What lessons can be learned by the ruling that impacted KPMG and the Creative Pipe case? There are several to be learned by litigants, IT staff and electronic discovery professionals:

  • Remain forthcoming at all times

  • Always fully cooperate with third parties and the opposing party

  • Come to an agreement with the opposing party if at all possible

When parties can come to an agreement by cooperating, a court will find little reason not to implement their combined decision in the case, instead of increasing the burden and costs with the usual approach of electronic sampling.

Working with a firm that understands the demands and legal processes during litigation allows breathing room when faced with complex ediscovery issues. Seeking a litigation support firm to provide information management assistance, and research and analysis using proven strategies, maintaining digital evidence will no longer be a costly burden, but will prove to be a competitive advantage.

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