North Carolina's Revised Rules Of Civil Procedure Regarding ESI

Revisions to the North Carolina Rules of Civil Procedure became effective to actions filed on or after October 1, 2011. A blacklined version showing the changes wrought by a law titled  an  "Act to clarify the procedure for discovery of electronically stored information and to make conforming changes to the North Carolina Rules of Civil Procedure" is here.  

You all are probably  familiar with these amendments already, as I’m behind the curve on this subject.. There’s lots out there on the web, way earlier than this post, from other law firms. Like here, here and here.  There are at least 39 states which have addressed the issue of e-discovery.  Here's the most current listing I've seen.

On the subject of other North Carolina changes, the North Carolina Bar Association has put together a comprehensive bulletin which is a “summary of new laws affecting North Carolina lawyers.”  One of the new laws you should look at, beyond the ESI-specific changes, is North Carolina's adoption of the Uniform Interstate Discovery and Depositions Act as N..C. Gen Stat. §§1F-1 to 7.  The Act defines clear procedures for an out of state litigant to get a subpoena to depose a witness (or to obtain documents) in North Carolina.  It also elucidates the procedure for a  litigant to in a North Carolina case to send a subpoena outside of North Carolina.  These procedures kick into effect on December 1, and apply to actions filed on or after that date.

 Definition of ESI Includes Metadata 

Rule 26 now contains a definition of ESI, though it is limited to the subcategory of metadata and whether that should be included in production It says that only limited metadata must be produced, absent an agreement between counsel:

For the purposes of these rules regarding discovery, the phrase 'electronically stored information' includes reasonably accessible metadata that will enable the discovering party to have the ability to access such information as the date sent, date received, author, and recipients. The phrase does not include other metadata unless the parties agree otherwise or the court orders otherwise upon motion of a party and a showing of good cause for the production of certain metadata

Recovery of Costs Of Production Of ESI

In a change which is destined to become the source of a good bit of pretrial wrangling given the high cost often involved in the gathering and production of ESI, Revised Rule 26(b)(3) now empowers the Court to “specify conditions for the discovery,” specifically “including allocation of discovery costs.”

Protective Orders

If a protective order is sought on the basis that the ESI is not “reasonably accessible,” Revised Rule 26(c) says that the Court can still order production if the requesting party shows “good cause” and the Court takes into account the considerations of Rule 26(b)(2(iii)), which allows the Court to limit discovery if “the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties' resources, and the importance of the issues at stake in the litigation.”

Privilege Issues

The revised rules amp up the obligations of an attorney withholding information on the basis of privilege. Revised Rule 26(b)(7)(ii) requires that the withholding party must “describe the nature of the documents, communications, or tangible things not produced or disclosed, and do so in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the claim.” That contemplates a privilege log.

Revised Rule 26(b)(7)(b) covers inadvertent production, and like Federal Rule 26(b)(5)(B), requires the party receiving the inadvertent production to promptly return or destroy  the material or to disclose it to the Court under seal so that the Court can rule on the claim of privilege,

New Discovery Conference Procedure

Another change in the NC Rules is that the attorney for a party may require a discovery conference to be held on a specified timetable (as soon as 61 days after the filing of the Complaint), and that the discovery plan should include a laundry list of items, including in the appropriate case “a reference to the preservation of [ESI], the media form, format, or procedures by which such information will be produced, the allocation of the costs of preservation, production, and, if necessary, restoration, of such information,. . . .”

Safe Harbor For Routinely Destroyed ESI

Revised Rule 37(c) provides a “safe harbor” from sanctions if ESI is destroyed as a result of “routine, good faith operation of an electronic information system.” The new Rule says that a court may not impose sanctions for a failure to provide what was routinely deleted, “[a]bsent exceptional circumstances.”
 

Tags:

Another Preliminary Injunction For Breach Of Fiduciary Duty

For the second time in a space of two weeks,  the Business Court granted a motion for a preliminary injunction against  an LLC member/manager as a result of breaches of fiduciary duty.  The first case was GoRhinoGo, LLC v. Lewis,  which I blogged about last week, and the second case, decided last Thursday, was Lake House Academy for Girls LLC v. Jennings, 2011 NCBC 40.

Lake House provides a residential therapeutic program to "troubled" girls aged 10 to 14.  It is one of only two programs in the United States directed at that target age group.  Lake House's boarding school is in Flat Rock, NC.  The other program is located in Bend, Oregon.  Op. ¶.5.  (Where do the mothers of 10-14 year old girls go for therapy?  My wife was fond of saying that she wanted to check into Charter Hills, a private psychiatric hospital in Greensboro, when our daughters were in that age bracket.  As things turned out, I should have listened and dropped her off there.)

Ms. Jennings was a member manager of the Lake House LLC.  Her breaches of fiduciary duty arose from her activities to set up a competing school in the same area as Lake House, to be called Glen Willow Academy. Judge Gale included in his opinion a laundry list of fiduciary duty violating conduct by Ms. Jennings.  Op. ¶¶39a-j.  This included soliciting Lake House employees to join the competitive entity, disparaging Lake House to the parents of daughters boarding there, leasing the space for Glen Willow's operations, and deleting documents from a Lake House computer.

Ms. Jennings defended the case on the basis that once she resigned as a manager of the LLC, she had no fiduciary duty to the LLC.  And, as she frequently pointed out in her brief, she had not signed a non-compete.  On that defense, she was part right.  Members do not owe fiduciary duties to each other or to the entity.  Op. ¶34.  But managers do, and much of Ms. Jennings actions took place before she resigned as a manager.  There was also an issue about whether her resignation as a manager was effective, because the Lake House Operating Agreement said that each member was a manager.  Ms. Jennings had sought to retain her status as a member when she resigned. 

The evidence at the preliminary injunction stage was enough to show a likelihood of success that Jennings had subverted Lake House's operations while she was a manager of the facility.  She was pretty candid and threatening about her plans.  According to a Lake House employee, Jennings said that she was "going to start up another school and that [she and others]  would make sure that no one would ever enroll another student at Lake House Academy and that she would make sure the school shut down and that [its employees] would all lose [their] jobs Op.  ¶14.

She also said “there would not be an educational consultant in the country who would make a referral to [Lake House]; I will make sure of that.” Op. ¶ 13

Irreparable injury was established by the impact of the opening of Glen Willow on a pending sale of Lake House.  Judge Gale said "[i]f Glen Willow Academy were to open its doors and compete with Lake House under these circumstances, such actions would unquestionably cause irreparable injury" to Lake House. Op. ¶46.  Ms. Jennings testified that the opening of the new school would affect the amount the buyer was willing to pay for Lake House.

On balancing the harms to the parties, the Court also ruled that Mrs. Jennings and Glen Willow Academy will suffer materially less damage or injury than Lake House if Jennings were permitted to open Glen Willow and compete with Lake House during the pendency of the litigation.  Judge Gale ordered Lake House to post a $100,000 bond as a condition of the injunction.

It was a big week in the courts last week for  breaches of fiduciary duty.  The Delaware Chancery Court entered judgment for $1.2 billion against corporate directors for their role in an acquisition of another company.  You can read about that case on the Delaware Corporate and Commercial Litigation Blog.

Company Waives Attorney-Client And Work Product Privileges Through Advice Of Counsel Defense

A broadly worded defense in a case challenging the sale of a company resulted in a waiver of the attorney-client and work product privileges last week, in Richardson v. Frontier Spinning Mills, Inc.

Richardson claimed that the company had improperly structured its sale so that non-employee shareholders like him were paid less for their stock than the shareholders who were employed by Frontier and that the company had failed to disclose material facts regarding the transaction.  The company defended by asserting that it had relied on the advice of its corporate counsel in how the sale was structured.

It is not unusual for counsel defending corporate directors to raise an "advice of counsel" defense because G.S. §55-8-30 says that directors may rely upon information provided by "[l]egal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence" in discharging their duties as directors.

According to the Business Court, there is "ample authority" that the raising of such a defense results in a waiver of the attorney-client privilege.  Given that the scope of waiver is often a "thorny issue" (Op. Par. 9), a defense relying on Section 55-8-30 should be carefully worded.  The defense before Judge Jolly in the Richardson case stated that

if it is determined there was illegal disparate treatment of the "Outside Shareholder[s]" and the "Inside Shareholders" or insufficient material disclosure in the Stock Purchase Agreement and otherwise, which the Defendants specifically deny, then Defendants assert that in the discharge of any legal responsibilities with respect to these allegations, they relied on the advice of counsel.

In his ruling, the Judge said that the word "otherwise" was "so broad as to be elusive of clear and reasonable definition." Op. at Par. 8. He said also that "[s]uch broad language makes it extremely difficult for the court to define fairly and reasonably where any resulting waiver of the attorney-client privilege begins and ends." Op. ¶10.

He held that the waiver covered any communications between the defendants and their counsel that took place before the closing of the sale and which reasonably related to a broad range of matters involving the sale.

The waiver extended to the work-product of counsel, because the statutory defense applies only if the director reasonably relies on the legal advice.  Judge Jolly relied on cases outside of North Carolina for the proposition that:

fairness dictates the necessity for an examination of the underlying good faith and reasonableness of the advice itself, including the circumstances surrounding issuance of the legal opinion, and that relevant work product therefore loses its privilege protections.

That exposed the lawyers to having to produce all documents reflecting communications between the law firm's primary counsel to the company and other lawyers at the law firm.

Judge Jolly said that "it would not have been difficult" to limit the scope of the waiver by limiting the wording of the defense. Op. 10.  That might be easier said than done.  Waiver is a slippery slope once you start heading down it.  There's no telling where you might end up.

 

I'm Back With An Update on Six Business Court Cases

i was gone (not fishin') for the entire month of September.  I haven't written on this blog since August and nobody has noticed.  Nobody has emailed me to ask where the heck I was or what I was doing or whether anything worth knowing had happened in the Business Court  The lack of any outcry about my absence hurt my feelings, but I am back even so with this September update on cases in the Business Court decided during the missing September.  They ran the gamut, from subpoenas to injunctions to how not to get an extension of time in the Business Court.

Standing to Object to Subpoenas to Non-Party Banks

In Deyton v. Estate of Kenneth C. Waters, Jr., 2011 NCBC 34, Judge Gale ruled that a party to a lawsuit lacked standing to object to a subpoena sent by the opposing party to a non-party bank.  The Judge observed that "as a general proposition, parties to a lawsuit typically lack standing to challenge a subpoena issued to a third party." 

Although there is an exception to that general rule if the objecting party has privilege in the documents requested,  the moving party attempted to invoke, Judge Gale held there is not a privilege created in bank records by the Federal Right  to Privacy Act of 1978 (12 U.S.C. §3402) or the North Carolina Financial Privacy Act (N.C. Gen. Stat. §53B-1, et seq.).

The rule might be different in federal court.  Judge Gale stated in a footnote that an Eastern District of North Carolina court has said in United States v. Gordon, 247 F.R.D. 509, 510 (E.D.N.C. 2007) that "[a] small number of courts have held that a party's claimed privilege with respect to his or her bank account records is sufficient to confer standing for purposes of challenging a subpoena."

In another case decided on the same day, Jones v. Sutherland, Judge Murphy, without the benefit of the Deyton discussion, considered an objection by a defendant to a subpoena to a non-party bank.  He denied the motion to limit the subpoena even though it covered a nine-year "extensive time period," saying it was not "designed to be a fishing expedition."

Continue Reading...