North Carolina Business Litigation Report : North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

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.”
 

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 So much of discovery depends on agreement: for example, where and when will the officers of an out of state corporate defendant appear for their depositions.  And what about an out of country defendant?  Can you make their representatives appear in the United States for a deposition if you can't persuade opposing counsel to do so?  There was no North Carolina state court authority on this point until yesterday, when Judge Jolly ordered in Cheatham v. Ribonomics, Inc., that the president and CEO of a Japanese company (MBL) which had invested in a North Carolina entity (Ribonomics) would be required to appear for a deposition in one of the 48 continental United States, the state to be  agreed upon by all counsel.

Before making that ruling, the Court denied Plaintiff's request for a video deposition   He based that denial on "notions of international comity and foreign sovereignty" as protected by the Hague Convention.  Since the witness would have been on Japanese soil for a video deposition, Judge Jolly observed that Japan's territorial sovereignty would be implicated.    The defendants said that Japanese law prohibits the taking of video depositions.

The same concerns for comity and sovereignty are not present when a foreign national's deposition is taken in the U.S.  From there, it becomes a question whether the Court has jurisdiction over the defendant corporation.  Because of MBL's controlling interest in Ribonomics, the Court found that MBL was subject to personal jurisdiction, and that it therefore could be "compelled under Rule 30(b)(6) to produce its officers, directors or managing agents in the United States to give deposition testimony."

Judge Jolly concluded his Order by directing counsel to agree on the "time, place, date and mechanics" of an in-person  deposition to take place "in any one of the States of the United States, other than Hawaii and Alaska."

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Until December 10, 2010, lawyers need to remain aware that, in cases pending in  federal court  their communications with their retained expert witnesses and any draft reports prepared by the expert are likely to be discoverable based on a request from opposing counsel.

The expert rule changes which become effective on December 10  will give work product protection to both items.  This will permit attorneys to have more involvement in the preparation of an expert's report without their involvement being subject to discovery. The new Rule also specifically exempts draft reports from any disclosure obligation.  

The limited exceptions to the work product protection specifically granted by new FRCP Rule 26(a)(4) (B) and (C) are contained in new FRCP Rule 26(a)(4)(C), and include:

• communications regarding compensation to be paid to the expert,
• "facts or data that the lawyer provided and that the expert considered in forming his opinion."
• assumptions provided by the attorney upon which the expert relied in forming his opinion.

The former practice of dodging the need to disclose communications with an expert or the expert's draft reports, by  which lawyers limited written communications to their experts and may have encouraged their experts not to keep drafts of their reports, will no longer be necessary.  The revisors felt that the discoverability of draft reports and the written give and take between lawyers and their experts "inhibited robust communications" between them.

The rule remains unchanged in the North Carolina Rules of Civil Procedure.  The Business Court ruled in 2008 that there is no privilege between counsel and an expert witness, which had been the general approach in federal cases. So, communications between lawyers and their experts remain discoverable in state court litigation regardless of the December 10 changes.

According to the judge chairing the committee responsible for the revisions the "changes will reduce cost, focus discovery and trial on the merits of the experts’ opinions, and allow parties and their counsel to make better use of their experts."  An interview in which he discusses the changes is here.

There are also changes to Rule 56, which governs summary judgment.  As I read the revised Rule, it doesn't mark a change in how lawyers in North Carolina would approach a motion for summary judgment, but it is worth a read before you file or oppose a summary judgment motion in federal court after December 10.

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It's rare to read a Business Court opinion granting a motion to restrict discovery on the basis of relevancy, but that's the subject of the Court's ruling today in Coremin v. McNamara.  Coremin, who was formerly a partner of a furniture-related business with the Defendant, sought discovery on the finances of the business after he was ousted from the partnership.

Plaintiff claimed that he was entitled to half the profits of the business since the dissolution of the partnership based on an oral agreement, and sought discovery on the profitability of the business for the three years after the dissolution.  The Court ruled that this discovery was outside the scope of relevancy.

The Court made its decision based on what partnership law would allow as a recovery to a partner forced out by dissolution.  The Uniform Partnership Act says that the partnership may be terminated by “the express will of any partner” without a violation of the agreement between them.  N.C. Gen. Stat. § 59-61(b) (2009). 

Either Coremin or McNamara was therefore entitled to dissolve the partnership at any time without any liability to another partner per a North Carolina Supreme Court decision cited several times in today's opinion, Campbell v. Miller, 274 N.C. 143, 161 S.E.2d 546 (1968).  In the case of such a dissolution, valuation of the partner's interest is determined as of the date of dissolution, making the post-dissolution financial information irrelevant.

The plaintiff argued that it was necessary to learn about the post-dissolution finances so he could have a discounted cash flow analysis performed.  Judge Tennille condemned that as "speculation," stating that "when a new partnership has no record of income, as here, the discounted cash flow method of valuation normally will be highly speculative and improper."

The result probably would have been different if the partnership agreement had provided for a post-dissolution share of the profits to Coremin.

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As discovery of electronically-stored information ("ESI") becomes more prevalent and relevant in litigation, so too does litigation regarding the obligation to preserve ESI.  Last Friday, the Business Court issued two orders reaching opposite results on motions for "non-spoliation" orders, based on significant differences between the scope of the preservation obligations that the plaintiff sought to impose.

In Capps v. Blondeau, the Business Court previously ruled that an arbitration clause was unenforceable.  Two defendants appealed that ruling and, during the pendency of the appeal, the plaintiff moved the Court for what they called "non-spoliation" orders (essentially, orders that parties preserve ESI) one against a defendant and one against Wachovia Bank.  In a pair of orders, the Court allowed the motion as to Wachovia but denied the motion as to the defendant.

Judge Jolly discussed several principles of note in the order denying the motion against the defendant, Morgan Keegan:

• As is typical in Case Management Orders in the Business Court, the CMO in this case already contained a mandate that the parties preserve relevant information, including ESI, until the conclusion of the lawsuit.  This suggested that a further order on the subject was unnecessary.
• When a lawsuit has already been filed, "the potential parameters of the claims – and the evidentiary importance of relevant information – are apparent."
• The Court's duty is to "weigh and balance the respective rights and interests of the parties" when determining the scope of any preservation obligation.

The Court examined the categories of information proferred by the plaintiff and determined that the breadth of those requests prevented the Court from entering any order that would impose a preservation obligation for specific information:

Many of the categories of Information defined in the Motion are stated in the form of either a request for production of documents and materials or in the form of interrogatories, and are not focused on the stated concept of Information preservation.   In substance, the requests are so broadly and loosely defined that the court is forced to conclude that it would be difficult, if not impossible, to enter a preservation order without micro-managing the preservation initiative to such an extent that the result likely would impose an unjust result on either Plaintiff or Morgan Keegan.   An order from this court requiring preservation of such Information would be difficult, if not impossible, for Morgan Keegan in good faith to obey or for this court to police.

In a footnote, the Court identified specific concerns about the scope of those requests:  "For example, the Motion makes multiple use of broad qualifying words such as 'any' and 'all' 'records' or 'communications' about a particular subject.  It also uses qualifiers seeking to preserve information about occurrences, events or 'communications' that took place 'at all relevant times.''''

In contrast, the Court allowed plaintiff's motion for an order against Wachovia, a third party who was served with a subpoena duces tecum.  There were three key differences between Wachovia and Morgan Keegan.  First, Wachovia was not a party and was not subject to the CMO, so a separate order was conceivably more necessary.  Second, Wachovia, unlike Morgan Keegan, never filed a response in opposition to plaintiff's motion.  Third, the scope of Wachovia's information that plaintiff sought to preserve was clearly and specifically outlined in the requests attached to the subpoena.  The Court listed and ordered preservation of those specific categories of information, such as signature cards, account statements, and transaction details for specific bank accounts.

In the end, however, the Court's reluctance to enter an order against Morgan Keegan did not mean that its preservation obligations were lessened:

The duty of Morgan Keegan and other party litigants to preserve Information relevant to the issues is apparent. The potential ramifications and available sanctions of a violation of that duty also are apparent. The court expects that Morgan Keegan and all other parties will discharge those duties appropriately and in good faith.

There are two takeaways for Business Court litigators.  First, if there is a CMO in place, preservation obligations already have been ordered against the parties, and the Court is likely to perceive a subsequent motion as superfluous.  Second, to the extent that a party wants to impose a preservation obligation, use of typical discovery terminology like "any" and "all," rather than identifying specific categories of information, will hamper that party's ability to impose an enforceable obligation on its opponent.

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Discovery disputes are often fought at the margins, and the question for any attorney responding to written interrogatories is how much information is necessary to be responsive.  In an order Tuesday, the Business Court disapproved of one common tactic:  the generalized Rule 33(c) answer.

In case you haven't answered interrogatories in a while, recall that Rule 33(c) allows a responding party to point the propounding party to responsive business documents rather than the responding party poring over those documents itself to create a written answer:

(c)        Option to produce business records. – Where the answer to an interrogatory may be derived or ascertained from the business records of the party upon whom the interrogatory has been served or from an examination, audit or inspection of such business records, or from a compilation, abstract or summary based thereon, and the burden of deriving or ascertaining the answer is substantially the same for the party serving the interrogatory as for the party served, it is a sufficient answer to such interrogatory to specify the records from which the answer may be derived or ascertained and to afford to the party serving the interrogatory reasonable opportunity to examine, audit or inspect such records and to make copies, compilations, abstracts or summaries.

In Phillips & Jordan, Inc. v. Bostic, the parties already had been through a full round of briefing and a status conference on the plaintiff's motion to compel.  Plaintiff asserted that the Defendants' supplemental responses still weren't enough.  To the Court's frustration, Plaintiff did not identify specific responses that allegedly remained deficient, but the Court decided to address the issue anyway in order "to avoid further motions practice in a case where counsel cannot agree on the time of day. . . ."

Judge Diaz ruled that the Defendants could not use Rule 33(c) "to foist upon Plaintiff the obligation to comb through the records for materials responsive to the Discovery Requests."  The volume of documents at issue was an important factor for the Court:  over 200 bankers' boxes of paper documents in a warehouse, plus electronic records.  Also important was that "the records are in total disarray" (which the Court determined based on photographs submitted by the Plaintiff of the inside of the warehouse where the records were stored).

The Court accordingly held that the Defendants were not entitled to use Rule 33(c) because "the burden to derive or ascertain the relevant information from the records is not the same for Plaintiff as for the . . . Defendants."  As a result, the Defendants were ordered to cull through their records to identify responsive documents and to "produce documents in a manner such that Plaintiff (and, if necessary, the Court) can readily identify the set of documents that are responsive to each interrogatory or request for production." (emphasis in original).  The Court also required each Defendant to file an affidavit within 10 days of production specifically setting forth how that Defendant complied with the Court's order.

This order is not the death knell for Rule 33(c), which remains a valid response to interrogatories.  However, the Business Court appears willing to scrutinize the use of Rule 33(c) and the surrounding circumstances.  Based on this order, Business Court practitioners wanting to avoid being on the wrong end of a motion to compel might consider at least two responses:  (1) identify specific documents that the propounding party needs to review to determine the answer and (2) narrow the universe of those documents to make sure that the burden on the propounding party truly is equal to the burden on the responding party.  Practically, it may be easier just to answer the interrogatory with the information requested.

Full Order

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If you have exchanged three-page letters with opposing counsel and held a short teleconference with dueling soliloquies on the scope of discovery relevance, you probably have complied with the meet & confer requirement that is a prerequisite to filing a motion to compel under North Carolina Rule 37 and any motion or objection related to discovery under Business Court Rule 18.6.  The minimum contact to satisfy that requirement may be that exchange; it may even be something short of that.  What does not satisfy the requirement is no contact at all, as a Business Court decision yesterday made clear.

In Northfield Investments, Inc. v. Regions Bank, a developer, Northfield, sued its lender, Regions, in June 2007 to try to enjoin a foreclosure sale, and Regions counterclaimed to collect under the promissory note at issue.  Two years later, in August 2009, Northfield moved to depose Regions's attorney , Derr, on the grounds that Derr may have "failed to timely transmit the Purchase Agreement to Regions so that Regions could adequately assess the offer, respond in good faith to its customer and agree to have its lien released upon the closing of the Purchase Agreement . . ."  Allegedly, the attorney's failure may have caused a third-party sale to fall through which otherwise would have maximized the value of the collateral. 

Derr filed a motion for sanctions under Rule 26(g) and attached email correspondence demonstrating that she did transmit the documents at issue to her client.  Northfield then withdrew its motion for leave to depose Derr.

Judge Diaz analyzed the parties' Rule 26(g) duties by the same objective reasonableness standard used in Rule 11 cases:  "a party’s inquiry is objectively reasonable if, 'given the knowledge and information which can be imputed to a party, a reasonable person under the same or similar circumstances would have terminated his or her inquiry and formed the belief that the claim was warranted under existing law.'”  He held that Northfield and its attorneys did not satisfy that duty in seeking Derr's deposition.

The Court rejected Northfield's proffered good-faith basis: 

9. The fact that Smith may have (during some unspecified timeframe) suggested to
Northfield that Derr was unresponsive to inquiries made in 2007 on the subject of the Purchase Agreement is a thin reed indeed on which to support a motion seeking to depose opposing counsel two years later.

10. Moreover, had Northfield and the Third-Party Defendants (or their new counsel)
spoken with Smith prior to filing the Discovery Motion, it is difficult to believe that Smith would not have refuted the factual premise for taking Derr’s deposition and made the relevant e-mails on the subject available to his former client, particularly since Smith was personally involved on behalf of Northfield in the discussions and e-mails surrounding the settlement negotiations. See N.C. Rev. R. Prof’l Conduct 1.16(d) (“[u]pon termination of representation, a lawyer shall . . . [surrender] papers and property to which the client is entitled[.]”).

11. Similarly, the fact that a Regions officer testified in a deposition that he could not
recall whether he saw the proposed settlement documents does not (without more) provide a good faith basis for believing that Derr in fact did not transmit the documents to her client.

12. The Court holds that the knowledge of Northfield’s prior counsel, including the emails between Smith and Derr refuting the factual basis for taking Derr’s deposition, should be imputed to Northfield and the Third-Party Defendants and their new counsel for purposes of determining whether they undertook a reasonable inquiry. Alternatively, a reasonable inquiry by Northfield and the Third-Party Defendants would have revealed the information contained in the e-mails without the need to file the Discovery Motion, which in turn would have made clear to these parties that their Discovery Motion was unreasonable.

The Court also chastised Northfield for declining Derr's invitation to discuss the issue, which refusal violated Business Court Rule 18.6:  "'Judges and lawyers should resurrect the original intention of the discovery rules, which was to make discovery a more cooperative and less adversarial system designed to reduce, not increase, the cost of litigation. . . .  Our system of civil justice cannot function effectively and economically unless lawyers . . . make cooperation [and] communication . . . cornerstones' of discovery."  Order ¶ 14 (quoting Azalea Garden Bd. & Care, Inc. v. Vanhoy, 2009 NCBC 9 ¶¶ 18-19).  On the other hand, the Court also believed that Derr was partly at fault for filing the Motion for Sanctions without first attempting to defuse the situation by producing the emails attached to her motion.

Nevertheless, the Court determined that Northfield bore the primary responsibility due to its failure to conduct a Rule 26(g) reasonableness inquiry and failure to satisfy the meet & confer obligations of Rule 18.6.  The Court allowed Northfield five days to respond on the issue of the reasonableness of Regions's requested fees.

 Full Order

 [UPDATE:  On July 1, 2010, Judge Diaz entered an Order awarding $10,630 in sanctions.]

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Not responding to Requests for Admissions is dangerous. Rule 36 of the North Carolina Rules of Civil Procedure say that a request is admitted if not answered, and that “any matter admitted under [Rule 36] is conclusively established unless the court on motion permits withdrawal or amendment of the admission.”

Two different panels of the North Carolina Court of Appeals in unpublished decisions yesterday dealt with defendants who hadn’t responded to Requests for Admission.

In one case, the Court affirmed a grant of summary judgment against the Defendant based on the ignored Requests. In the other, the Court went in a different direction and didn't hold the Defendant to an admission as to the amount of damages suffered by the Plaintiff.

Summary Judgment Based On Failure To Respond To Requests For Admission

In the first case, Kluttz v. Next Safety, Inc., the Plaintiff sued for breach of an employment contract. The Defendant denied the breach in its Answer, challenging the validity of the contract and whether it was supported by consideration. But the Defendant didn’t respond to later Requests for Admission which asked it to admit the validity of the contract and its breach.

The trial court entered summary judgment against the Defendant based upon the facts established by the admissions, and the Court of Appeals as affirmed. Judge Wynn said that “facts admitted under Rule 36(a) as a result of a party’s failure to respond timely to a request for admissions are sufficient to support a grant of summary judgment."

The Kluttz decision relied on an NC Supreme Court case, Goins v. Puleo, 350 N.C. 277, 512 S.E.2d 748 (1999), which holds that "an admitted matter, even if dispositive of the case, is conclusively established when admitted through failure to respond to a Rule 36 request for admissions."

Failure To Respond To Request For Admission Not Determinative Of Damages

The other case, Garner v. Cheek, noted the Goins decision, but relieved the Defendant from an admission as to the amount of damages. The Plaintiff had sent a series of Requests looking for admissions about Defendant’s fault in an auto accident and Plaintiff’s damages. One request asked the Defendant to admit that “[Plaintiff] has been damaged by the negligence of [Defendant] in the amount of thirty thousand dollars.”

Plaintiff sought and obtained a default judgment for $30,000. Defendant moved for a new trial on damages, arguing that he wasn't bound by the admission as to damages. The trial court granted the motion and entered a new judgment for only $7,500. The Court of Appeals affirmed.

There was conflicting evidence in the Garner case – from the same set of unanswered Requests for Admission – that warranted a much lower damage award. The Court of Appeals observed that  “plaintiff’s own evidence contradicted the amount of damages requested,” and it held that “it was within the trial court’s discretion to determine the amount of damages based on the Plaintiff’s medical expenses and pain suffered as a result of the collision."

The Garner case makes a couple of points about the nature of a Rule 36 admission from an earlier Court of Appeals decision, Eury v. N.C. Employment Security Comm., 115 N.C. App. 590, 446 S.E.2d 383 (1994):

A rule 36 admission is comparable to an admission in pleadings or a stipulation drafted by counsel for use at trial, rather than to an evidentiary admission of a party.

A judicial admission . . . is not evidence, but it, instead, serves to remove the admitted fact from the trial by formally conceding its existence.

If you understand either of those statements, please let me know. Apart from the riddle of how "judicial" admissions are different than "evidentiary" admissions, it's hard to square those statements from Eury with the explicit statement in the Supreme Court's Goins decision that an admitted matter is "conclusively established" by a failure to respond.

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The Plaintiff in Batlle v. Sabates didn't respond to Defendant's discovery for more than eight months. She served her responses only on the day that Defendant's motion for sanctions came on for hearing.The trial court granted the motion for sanctions and dismissed the Complaint as a result of the discovery violation.

The Plaintiff argued on appeal that her last minute service of the responses should have precluded the sanction of dismissal.

Today, the Court of Appeals affirmed the dismissal, in a thorough opinion by Judge Ervin. He concluded that:

Plaintiff has cited no authority tending to establish that the trial court abused its discretion by dismissing Plaintiff's complaint after such a lengthy, eight month delay because Plaintiff ultimately served responses upon Defendant, and we are aware of none. Furthermore, given the length of Plaintiff's delay in responding to Defendant's discovery requests, a reasonable trial judge could well have concluded that the last minute provision of discovery on 4 September 2007 did not suffice to preclude dismissal.  Thus, the fact that Plaintiff provided discovery at the last minute does not establish that the trial court abused its discretion by dismissing Plaintiff's complaint.

Op. at 19.

The Court also rejected the argument that the Defendant was required to show prejudice as a result of the delinquent discovery, holding that the trial court "was not required to find prejudice as a precondition for dismissing Plaintiff's complaint." Op.at 21.

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The Business Court sanctioned the Defendants in Clark v. Alan Vester Auto Group, Inc., 2009 NCBC 18 (N.C. Super. Ct. July 17, 2009) for spoliation of evidence.

The destruction of evidence involved "Cover Sheets" that the Defendants prepared whenever they sold a car. The Plaintiff contended that an entry on a Cover Sheet referring to "CFA" -- which was shorthand for "customer funding assistance" -- would have shown the Defendants' falsification of information regarding the down payment made by the customer.

The Defendants continued to destroy Cover Sheets even after the Court entered an Order requiring them to produce all records which showed down payments. When Plaintiffs' counsel learned of the continuing destruction, they asked Defendants through counsel to stop, but the response was that the Plaintiff would "continue with its normal business practice that has been in place for many years." There was in addition conflicting testimony from representatives of the Defendants regarding their procedures with regard to the Cover Sheets.

Judge Jolly determined:

• "Where there has been improper destruction of documents even without notice of a claim, there can exist spoliation, particularly when the wholesale document destruction flies in the face of legal standards for document retention." Op. ¶73. (NC's motor vehicle laws require down payment records to be retained for four years.)
• Plaintiffs didn't need to show that the spoliation involved intentional misconduct.
• Prior litigation against the Defendants with regard to their financing practices established the knowledge and culpability of the Defendants with regard to the spoliation.
• Defendants knew of the probative nature of the Cover Sheets when they were destroyed.
• The Plaintiffs were prejudiced by the destruction. 

On sanctions, Judge Jolly ruled that he had "discretion to pursue a wide range of actions both for the purpose of leveling the evidentiary playing field and for sanctioning the improper conduct."  Op. ¶81. He said "the scope of discovery is intentionally broad, and discovery is not meant to be a game of hide and seek. The purpose of the discovery rules is 'to prevent a party who has discoverable information from making evasive, incomplete, or untimely responses to requests for discovery.'" Op. ¶83.

The Court didn't enter the sanction requested by the Plaintiffs, which was a striking of Defendants' Answer, but ruled instead that it would give a "appropriate spoliation jury instruction with regard to inferences raised by the absence of Cover Sheets."  In addition to the adverse inference instruction, the Court awarded Plaintiffs their attorneys' fees relative to the spoliation issue. Also, in a companion decision certifying a class action, the Court took the spoliation into account in determining that a class should be certified, and also ruled that the spoliation would cause the burden of class notice to shift from the Plaintiffs to the Defendants.

I have not included the briefs because they were all filed under seal.

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The Business Court today granted a Motion to Compel and delivered a harsh sanction to the Plaintiff: dismissal with prejudice of its Complaint.   The case is TelSouth Solutions, Inc. v. Voyss Liquidation Company, LLC.

Plaintiff's failure to timely respond to discovery, standing alone, might not have warranted dismissal, but It had been preceded by a string of failures to meet deadlines. 

Those began with a failure to file the Case Management Report per Rule 17, continued with a failure to respond to a counterclaim resulting in an entry of default, then a lack of compliance with the deadlines in the Case Management Order for mediator selection and cost estimates, and culminated in Plaintiff no-showing at a hearing regarding the missed deadlines. 

The failure to respond to discovery was then the straw that broke the camel's back. The due date came and went for responses to interrogatories and document requests.  Defendant's counsel followed up and asked for responses, but Plaintiff's counsel responded that he had "been traveling and [was] swamped."  The responses finally came about two months after they were due, and only after more prodding from Defendant's counsel. 

Judge Diaz observed that Rule 37 provides for a wide range of sanctions for a party who doesn't respond at all to interrogatories, including "[a]n order striking out pleadings . . . or dismissing the action or proceeding."  He said that "the Court may impose drastic sanctions for discovery violations, including dismissal of claims with prejudice when it is 'just' to do so," and that it wasn't necessary for there first to be an order directing compliance.

Plaintiff's counsel said at the Motion to Compel hearing that his inability to respond "was the result of factors beyond his client's control."  The Court held that it was true that "if a party is unable to answer discovery requests because of circumstances beyond its control, an answer cannot be compelled," but said that there was no evidence presented as to the reason that Plaintiff was unable to respond.

The Court held that "Plaintiff has demonstrated (time and again) an unwillingness to give proper attention to litigation that it initiated. In light of Plaintiff’s most recent transgression, and because the fact discovery deadline has now expired, the Court concludes, in its discretion and after considering lesser sanctions, that the appropriate sanction is dismissal of Plaintiff’s Amended Complaint with prejudice." 

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There isn't much out there in the way of a road map from North Carolina's state courts on how lawyers should fulfill their obligations to produce electronically stored information. So you might want to take notice of a little bit of direction in today's Order from the Business Court in Hill v. StubHub, Inc.

By a little bit of direction, I mean exactly that.  It's only this tidbit from the last paragraph of the Order, where Judge Tennille said:

Attached hereto is an opinion from Magistrate Judge Andrew Peak in William A. Gross Construction Association, Inc. v. American Manufacturers Mutual Insurance Company.  It contains a message for counsel. 

What's the message of American Manufacturers?  Well, that case involved a dispute between parties about how a keyword search of an email database in the hands of a non-party ought to be done.  The parties disagreed on what words ought to be searched for.  One wanted narrow terms, the other broad terms, and no one had bothered to talk to the party that held the emails about what would make sense.

Instead of making any deliberate effort to resolve the issue, the parties dropped the problem in Judge Peck's lap.  He wasn't happy about being the decider, noting that he was "no keyword expert."  He said:

This case is just the latest example of lawyers designing keyword searches in the dark, by the seat of the pants, without adequate (indeed, here, apparently without any) discussion with those who wrote the emails.  Prior decisions . . . have warned counsel of this problem, but the message has not gotten through to the Bar in this District.

Judge Peck said he was delivering a "wake-up call to the Bar."  He said that "[i]t is time that the Bar -- even those lawyers who did not come of age in the computer era -- understand" what it takes to craft an appropriate keyword search.  He stressed the "need for careful thought, quality control, testing, and cooperation with opposing counsel in designing search terms . . . to be used to produce emails or other electronically stored information."

So, that's the "message" conveyed today by Hill v. StubHub. Judge Tennille told the parties that they had twenty days "to meet and confer and agree upon a word search that is carefully crafted with the appropriate keywords determined after consultation with StubHub's ESI custodians."  He also ordered the parties to "address quality control and testing in their discussions and, if the volume of documents is excessive, use of appropriate sampling methodologies."

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The North Carolina Business Court delivered a significant opinion on discovery sanctions today in Azalea Garden Board & Care, Inc. v. Vanhoy, 2009 NCBC 9 (N.C. Super. Ct. March 26, 2009). If you are litigating in the Business Court, you'd better read this one, which emphasizes the duty of lawyers to cooperate with one another in discovery.

The Defendant's Motion for Sanctions concerned an interrogatory response by Plaintiff identifying two attorneys as potential expert witnesses, its subsequent refusal based on attorney-client privilege to supply information that it had provided to the experts, and its withdrawal of those persons as experts after the Court granted a Motion to Compel.

That earlier ruling on the Motion to Compel was very short, and wasn't published, but if you were reading this blog you would have seen it in this May 2008 post.

The Defendant, having prevailed on the Motion to Compel, sought sanctions. The basis for the Sanctions was Rule 26(g) of the North Carolina Rules of Civil Procedure, which provides that an attorney's signature on a discovery response is a certification that it is "consistent with the rules," and "not interposed for any improper purpose," and "not unreasonable or unduly burdensome or expensive."

In a first impression aspect of his ruling, Judge Tennille said that sanctions under Rule 26(g) are mandatory in the event of a violation.  He also said that Rule 11 cases don't have much relevance in a Rule 26(g) sanctions motion.

Judge Tennille emphasized the duty of attorneys to cooperate in discovery in complex cases, quoting extensively from Mancia v. Mayflower Textile Serv. Co., 253 F.R.D. 354 (D.Md. 2008), an opinion by Magistrate Judge Paul Grimm.  Judge Tennille described Judge Grimm as "one of the leading commentators on discovery issues in the federal court,"  and said that "his entire opinion should be read by all trial lawyers."  Op. ¶18. (The link is in the case name).

Forthright discovery is particularly important, said Judge Tennille, when expert discovery is involved.  He held that "[o]ur rules are designed to flush out what opinions are going to be expressed at trial so that challenges to those opinions can be heard pretrial without wasting the jurors’ time. Responses to discovery that comply with the rules save the parties and the courts substantial time and money." Op. ¶13.

Here's how Judge Tennille summed it up:

Judges and lawyers should resurrect the original intention of the discovery rules, which was to make discovery a more cooperative and less adversarial system designed to reduce, not increase, the cost of litigation. North Carolina’s Rule 26(g) was designed to do that and mandates sanctions when violations of the rule occur. Our system of civil justice cannot function effectively and economically unless lawyers and judges return to the original intention of the discovery rules and make cooperation, communication, and transparency the cornerstones of the discovery process.

Op. ¶19.

On the facts before him, Judge Tennille entered sanctions.  He determined that Rule 26(g) had been violated because Plaintiff's counsel had (1) designated one person (Wagner) as an expert "without an intention of having  Wagner prepare any expert report containing his opinions and the basis therefore, (2) failing to make inquiry into Wagner’s qualifications to give any expert opinions, and (3) designating [another witness, Tarr] as an expert without even having communicated with Tarr." Op. ¶28.

The Court found that these actions had caused delay and undue expense for Defendant and his counsel, necessitating a Motion to Compel, and furthermore that "[t]he conduct was unreasonable under the circumstances. It was more than mere negligence."  Op. ¶28.  The Court also said that the refusal to provide information based on attorney client privilege was "totally unfounded in the law." Op. ¶29.

Another factor leading to sanctions was Plaintiff's counsel refusal to discuss matters with Defendant's counsel.  Judge Tennille said that "[l]awyers have a responsibility and a duty to their clients, the Court, and opposing counsel to communicate openly and civilly with each other. A failure to do so is a breach of their professional duties and results in unnecessary delay and expense to the parties and the Court." Op. ¶32.

Brief in Support of Motion for Sanctions

Brief in Opposition to Motion for Sanctions

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In cases in the Business Court, the lawyers are often assisted by computer forensics experts in dealing with electronic discovery issues. That’s becoming almost essential in complicated business cases.

Anyone can do this type of work right now.  I get regular phone calls and emails from people pitching this type of work.  But there is regulation in the works in North Carolina to clamp down on who can provide computer forensic services.

The North Carolina Board which regulates private investigators is looking at proposing legislation that would require that someone be a licensed private investigator before being able to do computer forensics work. Regulation in this area isn’t a revolutionary idea. You have to be licensed in some states to analyze electronically stored information, although there are great variances from state to state. Kessler International recently did a national survey on state licensing requirements.  An American Bar Association Committee recently issued a report recommending against such licensing, as discussed below.

The driving force for the North Carolina legislation is the Private Protective Services Board, which regulates private investigators and others in the "private protective services professions."  The Board is working on amendments to N.C. Gen. Stat. Chapter 74C to require a private investigator’s license for anyone doing computer forensics consulting.

Here's a draft of the legislation, which was recently approved by the Board's Computer Forensics Committee. It creates a new license category for a "Digital Forensics Examiner," which it defines as "any person who, on a contractual basis, engages in the profession of or accepts employment to conduct examinations of digitally stored data in order to recover, image, analyze, or examine such data to determine responsibility and/or reconstruct usage of such data."  A person seeking such a license will need to have 3,000 hours of experience in digital forensics or a closely related field in order to be licensed, and to have completed basic training offered by the company supplying the analysis software used by the licensee.

The Board provided me with excerpts from other committee meetings at which the amendments were discussed, and also the draft minutes from the June 9, 2008 meeting of the committee.

Attorneys are exempt from the current statute, as are their agents, “provided the agent is performing duties only in connection with his or her principal’s practice of law.” G.S. §74C-3(b)(4). That exemption presumably would continue if the statute is amended, so this legislation may not prove to be a major issue for litigation matters if a lawyer retains the consultant, but if a client hires a consultant to perform analysis before litigation, that might be an issue. 

The proposed amendment also exempts accountants and others it defines, including "persons employed to conduct network security operations up to the point of responsibility for network security violations," and "members of network security compromise response teams."

The American Bar Association's Section of Science and Technology Law is also looking at this issue, and has come to a completely different conclusion regarding the need for licensing. The Report from the Section concludes that there shouldn't be licensing, and recommends that the ABA should take a position discouraging the states from enacting regulatory legislation. Their rationale is that this is a technical area outside the expertise of those regulating private investigators, that there are professional certification programs available for forensic specialists, and that judges can in the final analysis determine whether a person is qualified to testify about the forensic work that he or she did. (Thanks to the TechDirt blog for this information).

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There's going to be a new Federal Rule of Evidence, approved by voice vote in the House this week and unanimously by the Senate earlier this year.  It's on President Bush's desk for signature (that's him signing the baseball in the picture at the left), and should be on the books in the next few weeks.  

The new addition to the Rules is Rule 502, titled "Attorney-Client Privilege and Work Product: Limitations on Waiver."  New Rule 502 covers the scope of a waiver of privilege and the issue of inadvertent production of privileged documents, among other waiver related issues. 

The full text of the Rule is at the bottom, but here's a synopsis:

• If a waiver of privilege is found, the waiver extends to undisclosed communications or information only if (1) the waiver is intentional,  (2) the other communications involve the same subject matter, and (3) the communications "ought in fairness to be considered together."  Rule 502(a).
• If the disclosure is inadvertent, it does not operate as a waiver in either federal or state court if (1) the disclosure was inadvertent, (2) the holder of the privilege took "reasonable steps to prevent disclosure," and (3) the holder "promptly took reasonable steps to rectify the error."  Rule 502(b)
• If the disclosure was made in a state court proceeding, it doesn't operate as a waiver in a federal proceeding if either the disclosure wouldn't have been a waiver under the federal rule, or it wouldn't be a waiver under state law. Rule 502(c).
• If the Court enters an Order (like a consent Protective Order) that a disclosure will not be a waiver, that Order will bar any determination by another federal court or a state court that a waiver has occurred.  In other words, such a judicially approved non-waiver provision will have effect beyond the pending litigation, which isn't the case now.  Since parties can provide by such an agreement that, for example, there will be no waiver irrespective of the care taken by the disclosing party, no-waiver provisions will no doubt become stock provisions in Protective Orders. An agreement between the parties on waiver issues won't be effective unless it becomes part of a Court Order.  Rule 502(d) and (e).

The new Rule resolves conflict between courts throughout the country on whether an inadvertent production results in waiver.  North Carolina's District Courts had reached different conclusions on that issue.  Scott v. Glickman, 199 F.R.D. 174 (E.D.N.C. 2001) and Parkway Gallery v. Kittinger/Pennsylvania H. Group, 116 F.R.D. 46 (M.D.N.C.1987) followed the flexible approach espoused by the new Rule, but the Western District had held that even an inadvertent production waived privilege, in Thomas v. Pansy Ellen Products, Inc., 672 F. Supp. 237 (W.D.N.C. 1987).

The Rule takes effect immediately upon the President's signature.  It applies to all cases filed after its enactment, and applies to pending cases "insofar as is just and practicable."

I read about Congress' passage of the Rule on the Electronic Discovery Law blog. The full text of the Rule is below, the explanatory note is here.

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In North Carolina Superior Court, there is no civil procedure tradition more respected than the courtesy of a thirty day extension of time to answer a Complaint or to respond to discovery.  Like it or not, motions seeking the extra month are granted almost without exception, and are so routine that the requesting party usually doesn't even bother to ask for the consent of opposing counsel.

The same courtesy applies in the Business Court, but there are rules to be followed.  Business Court Rule 9.2 says that "the movant shall have a good faith basis for requesting any such extension of time and, except in extraordinary cases, the movant shall first consult with any opposing party and reflect that party's position in the motion and indicate whether the opposing party wishes to be heard on the motion."

If you don't follow the Rules, you aren't going to get your extension. That's the message of a short ruling today in Velocity Fiber Broadband, LLC v. Lang Management, Inc., in which the required consultation hadn't occurred.  Judge Jolly, in denying the plaintiff's motion to respond to a counterclaim, stated "notwithstanding that the . . . reporting requirements of Rule 9.2 of the Business Court Rules may be viewed by some as merely a technicality and not substantive, the requirements are clear and simple, and compliance with them promotes efficiency in case administration by the court and counsel."

There are hyperlinked Business Court Rules available on the sidebar of this blog.  By hyperlinked, I mean that you can click on a section of the table of contents of the Rules and you'll get taken to the particular Rule, and then you can click back again.

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The small Arizona town of Sedona is one of the centers of the e-discovery universe, and the Sedona Conference's Best Practices for dealing with electronic discovery issues have been favorably referenced by many Courts, including the North Carolina Business Court (see here and here).

Now, the Conference has put out a Commentary on Preservation, Management and Identification of Sources of Information that are not Reasonably Accessible.  Why should you care about that?

The answer is that the term "reasonably accessible" is contained in Rule 34 of the Federal Rules of Civil Procedure, governing document production, which says that "a party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost."  (North Carolina Rule 34, last amended twenty-one years ago with a quill pen, contains no such language).

The new Commentary contains detailed guidelines for determining how to make the determination of accessibility, and when electronic information should be preserved.  The Guidelines themselves are below, from the Electronic Discovery Law blog (which is a great resource for court decisions on e-discovery matters) but the Commentary itself contains many useful examples and case citations and is worth reading.   

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There was an article in the ABA Journal a few months ago about the Judges who are the "rock stars" of electronic discovery issues.  Two of those Judges, Paul Grimm of the District of Maryland and David Waxse of the District of Kansas, formed a "rock star trio" with Judge Tennille on an ABA panel earlier this year.

The subject was ethical issues in e-discovery.  You can download the whole presentation on the ABA website for a more than nominal fee.  But if you don't want to do that, here's some of what Judge Tennille had to say:

As Judge Tennille sees it, the "most important rule for lawyers' from an ethical perspective is Rule 1.1, which is "Competence."  That Rule requires "the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation."  According to Judge Tennille, state court judges are looking to the lawyers and expecting them to present solutions to e-discovery issues.  As he put it, Judges are saying “I expect you to have the knowledge to handle this problem. I expect you to meet and confer with each other and tell me how you’re going to solve this problem.”

Judge Tennille referenced a Business Court case where the lawyers for a party turned over a mirrored hard drive to opposing counsel, and then had to scramble when it turned out that there were privileged documents on the hard drive.  Using that example, Judge Tennille said “You really have a very basic obligation to be compeltent in this area. And in my view, being competent does not mean turning your client’s hard drive over to the other side.”  So, reaching agreement in advance to deal with this type of situation, and including a clawback provision providing for the return of privileged documents, is a part of that competence.  (Although Judge Tennille didn't name the case, it is Judge Diaz' opinion in International Legwear Group, Inc. v. Legassi International Group, Inc.)

The seminar turned to a discussion of the California case (Qualcomm) sanctioning lawyers for their failure to turn over a substantial quantity of emails and misrepresenting the situation to the Court, and Rule 3.3's duty of "Candor Toward The Tribunal."  Judge Tennille said “I think the best rule for you to keep in mind is not to follow the old suggestion that it is easier to ask foregiveness than permission. If you have a question, you ask for permission first. Because it’s really not worth risking your law license to ask for foregiveness later.”

On the subject of lawyers who play fast and loose with e-discovery, Judge Tennille said: “I think judges generally try to look at it from the standpoint of when we’re trying to determine if somebody is gaming the system, we look at process and motivation and if you’ve got a good process and we don’t have any question about your motivation, you’re not going to be in trouble. If you haven’t used a good process or we have any question about your motivation or the client’s motivation and what they did, chances are that we’re going to determine that you were gaming the system and your client will suffer from that, 99 times out of a 100.”

And then Judge Tennille said something that seems so easy to understand: "The best test is your common sense. And if you use it you’ll stay out of trouble. if you don’t, there’s going to be a judge somewhere who will penalize you for not using your common sense.”

Judge Tennille has written two Business Court opinions on the subject of e-discovery, Analog Devices, Inc. v. Michalski, 2006 NCBC 14 (N.C. Super. Ct. Nov. 1, 2006) and Bank of America Corporation v. SR International Business Insurance Company, Ltd., 2006 NCBC 15 (N.C. Super. Ct. Nov. 1, 2006), but that is still a largely uncharted territory in North Carolina's state courts.

The image at the top is from xkcd.com, edited.

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An Order granting discovery sanctions in the Western District of North Carolina is the basis for a $107 million malpractice lawsuit against a New York law firm.

The discovery Order was entered two years ago in a multidistrict proceeding formerly pending in Charlotte.  The case, just recently settled, involved the alleged price fixing of polyester staple fiber. 

The law firm of Kaye Scholer represented CNA Holdings, Inc. and Celanese Americas in that litigation.  Judge Vorhees sanctioned Celanese for failing to produce a significant quantity of responsive documents. 

According to the Amended Complaint filed on June 25th against Kaye Scholer, Judge Vorhees ruled from the bench that:

[T]he efficient disposition of a case like this one depends on full and candid discovery and [Celanese has] withheld that compliance with their obligations . . . . The efforts by [Celanese] do not meet the requirements of the discovery rules or the court’s directives . . . . The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling. And they don’t encourage the court to rely on the good faith of [Celanese]. . . . The efforts by [Celanese] to play cat and mouse with the court and with the non-class plaintiffs since at least 2004 is unbecoming . . . to say the least.

The sanction entered by the Court in the antitrust litigation was that Celanese had to pay opposing counsel's attorneys' fees in pursuing the discovery motion, which were more than $100,000, and that the Court would consider further sanctions.  Shortly after that, Celanese fired Kaye Scholer.

New counsel then conducted a comprehensive review of Celanese's records which resulted in the production of hundreds of thousands of additional documents.  The Plaintiffs in the North Carolina case responded by asking for an array of additional sanctions, including (a) a default judgment against Celanese, (b) a finding of fact that Celanese had engaged in “bad faith, willful and deliberate discovery misconduct,” (c) instructions to the jury that this misconduct reflected consciousness of guilt, and (d) adverse inferences against Celanese on claims that it engaged in an illegal price-fixing conspiracy.

Judge Vorhees withheld ruling on the sanctions requested by Plaintiffs, but stated that he "did not take lightly the allegation that material false written and oral misrepresentations were knowingly and intentionally made" to the Court and the Plaintiffs. 

Celanese settled the antitrust claims in May 2008 for $107 million.  In the new lawsuit, Celanese says it was forced to pay this substantial settlement because "[t]he North Carolina Federal Court's sanctions rulings and the threat of additional severe sanctions at trial resulting from Kaye Scholer's conduct materially changed Celanese's likelihood of success at trial."  As Celanese put it, "the inflated $107 million settlement forced by Kaye Scholer's misconduct was essential to avoid the potentially devestating impact of sanctions that would have undermined Celanese's defense on the merits and would have exposed Celanese to catastrophic treble antitrust damages."

Celanese is seeking from Kaye Scholer a return of the legal fees it paid the firm, plus the difference between the $107 million settlement and what it claims would have been a "nominal settlement" in the absence of the discovery issues.  Celanese bases its claim that the antitrust claims had minimal value on memoranda in which Kaye Scholer opined that the case presented little risk.

The lawsuit is pending in federal court in Texas.  Kaye Scholer has filed its own lawsuit in the Southern District of New York seeking the recovery from Celanese of unpaid legal fees, and a declaration that its legal work was properly performed. 

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The only place that you are likely to find a written opinion from a North Carolina Court on a discovery issue is from the Business Court.  Those kinds of interlocutory issues just don't get addressed by appellate courts. 

So, here's a post about a (very) short June 10, 2008 Order in Harco National Insurance Co. v. BDO Seidman, LLP, on an interesting work product issue.

In Harco, the general counsel of the Defendant, an accounting firm, sent a representative to interview one of the key players in the audit that was at issue in the lawsuit. 

The Plaintiff deposed both the interviewer and the person interviewed.  The Defendant balked, however, when Plaintiff's counsel asked the interviewer questions about the objectives of the interview and whether certain questions had been asked at the interview.  The Defendant also refused to produce the interviewer's notes.  The Defendant contended that all of this information was protected by the work product privilege.  Plaintiff filed a Motion to Compel.

According to Defendant's Brief in opposition to the Motion, some of the objectionable questions were whether the interviewer had conducted the interview with particular questions in mind, whether she had focused on particular areas of the audit, whether she showed the interviewee particular documents, and what conclusions she reached after the interview.

Judge Tennille denied the Motion, holding that the interviewer (Ms. Lister):

declined to answer questions which called for her mental impressions and litigation strategy based upon attorney-client privilege and work product. Ms. Lister conducted the interview at the direction and under the supervision of the General Counsel of BDO in order to prepare BDO’s defense to the claims asserted in the lawsuit. The Court concludes that the limited amount of information withheld by Ms. Lister was protected as attorney work product under N.C. R. Civ. P. 26(b)(3). Harco elicited testimony about what was said and done at the interview. The information it now seeks relates to impressions and opinions Ms. Lister formed and conveyed to BDO’s General Counsel. Harco has not demonstrated any hardship as it has obtained discovery of the underlying facts. Harco’s Motion to Compel is denied.

Plaintiff's Brief in support of its Motion isn't available because it was filed under seal, but its Reply Brief is here.  The link to Defendant's Brief is above.

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The Court granted a Motion for Protective Order yesterday in Delhaize America, Inc. v. Hinton.  There's nothing particularly remarkable about the entry of a Protective Order, which usually happens by consent, but this Protective Order may set some precedent in future Business Court cases.

The case involves the type of tax refund litigation which is within the Business Court's mandatory jurisdiction under N.C. Gen. Stat. § 7A-45.4(a)(7).  The Order was entered against the North Carolina Department of Revenue over its objection. 

The Department of Revenue had sought extensive information regarding Delhaize's business activities which Delhaize offered to produce subject to a Protective Order. 

The Department, in its Brief, raised a series of objections to the information being kept confidential.  It said that:

Delhaize was "attempt[ing] to cloak its tax refund litigation in a veil of secrecy;"

A Protective Order would "violate the public's right of access [to the courts] under state and federal law," including the First Amendment;

The North Carolina Public Records Act compelled public disclosure of the information requested; and

Delhaize's request for a refund operated as a waiver of its rights under the North Carolina "Taxpayer Bill of Rights."

All of these objections were effectively rejected by the Court's entry of the Order.  The Order itself contains no discussion of the basis for the ruling and is a fairly standard Protective Order.

Delhaize's Brief, setting out the reasons why a Protective Order was appropriate, is here.  (My partners Reid Phillips, Bill McNairy, and Andy Haile represent Delhaize in this case).

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Hilb Rogal & Hobbs Co. v. Sellars, 2008 NCBC 12 (N.C. Super. Ct. June 6, 2008)(Diaz)

It is very common to get discovery responses which have "General Objections" up front, followed by specific objections to each of the numbered discovery requests.

There's a danger in responding that way, based on Judge Diaz's opinion today in Hilb Rogal & Hobbs Co. v. Sellars.

In Hilb, Defendant's responses to interrogatories contained general objections "on grounds of relevancy, scope, and undue burden."   Plaintiff moved to compel on particular responses which it contended were not adequate.  Defendant argued that the information sought wasn't relevant, but he hadn't included that as an objection to the responses at issue.

The Court cast doubt on whether the objection had been properly presented.  The Court first held that the Rules of Civil Procedure require a party to state its objections in response to each interrogatory:

Rule 33 of the North Carolina Rules of Civil Procedure requires that each interrogatory “be answered separately and fully in writing under oath, unless it is objected to, in which event the reasons for objection shall be stated in lieu of an answer.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007). Moreover, “[a]n objection to an interrogatory shall be made by stating the objection and the reason therefore either in the space following the interrogatory or following the restated interrogatory.” N.C. Gen. Stat. § 1A-1, Rule 33 (2007) (emphasis added).

The Court then stated what it said was the ruling of most federal courts on the subject of general objections:

'objections stated at the beginning of the response to the interrogatories, are ineffective and are an abuse of the discovery process because such objections block discovery without explaining why and to what extent.' Waters Edge Living, LLC v. RSUI Indem. Co., 2008 U.S. Dist. LEXIS 33049, at *11 (N.D. Fla. Apr. 22, 2008).

Although the Court considered the objection as to relevancy anyway (and found it to be without merit and based on a "crabbed" reading of the interrogatories), there's clearly a risk in presenting general objections in the manner at issue in the Hilb case

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The Business Court is serious about lawyers complying with their meet and confer obligations before filing discovery motions. 

This week, in Wicks v. Moody, the Court denied the Plaintiff's Motion for a Protective Order because of counsel's failure to comply with the certification requirements of Business Court Rule 18.6.  Judge Tennille held that "this reason alone is sufficient for the Court to deny Plaintiff's motion."

This isn't the first case in which the Business Court has summarily denied a discovery motion for this reason.  In a July 2007 case, International Legwear Group, Inc. v. Legassi International Group, the Court struck a Motion to Compel, even though the moving party had attached substantial correspondence showing an effort to resolve the issues.  Judge Diaz held:

while the Motion contains a 23-page attachment purporting to summarize the various discussions of the parties relating to their discovery dispute, it does not contain the certificate of compliance contemplated by Business Court Rule 18.6(a). The purpose of the certificate is to have the moving party succinctly set out what was done to resolve the dispute short of judicial intervention—the Court has no interest in, nor should it be burdened with, sifting through 23 pages of correspondence to determine whether the parties have complied with its rules.

In Latigo Investments II, LLC v. Waddell & Reed Financial, Inc., a January 2008 case, the Court held that the Rule 18.6 applies even when the discovery at issue is being sought from a non-party. 

North Carolina Business Court Rule 18.6(a) says that "the Court will not consider motions and objections relating to discovery unless moving counsel files a certificate that, after personal consultation and diligent attempts to resolve differences, the parties are unable to reach an accord. The certificate shall set forth the date of the conference, the names of the participating attorneys, and the specific results achieved. It shall be the responsibility of counsel for the movant to arrange for the conference and, in the absence of an agreement to the contrary, the conference shall be held in the office of the attorney nearest to the Court where the case was originally filed. Alternatively, at any party’s request, the conference may be held by telephone."

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This short Order has a valuable nugget on the discoverability of communications between lawyers and their expert witnesses.

One of the Defendants moved to compel discovery from the Plaintiff to obtain documents exchanged between the Plaintiff's lawyers and their expert. 

The expert, however, was also the President of the client and the central fact witness.  Plaintiff resisted production on the grounds of attorney-client privilege. 

It made no difference to the Court that the expert was also the client.  It held:

"Plaintiff’s assertion of the attorney client privilege to shield discovery of any communications with counsel involving his expert opinions is misplaced. Expert witnesses are subject to specific rules of discovery under the North Carolina Rules of Civil Procedure. N.C.R. Civ. P. Rule 26(b). Generally, the facts known to and the opinions held by an expert are discoverable as well as the materials the expert relied upon in coming to his or her opinion. See id. at Rule 26(b)(4), 26(b)(1). If [the expert's] opinions are based upon any information supplied to him by counsel that information is discoverable and Plaintiff is required to make disclosures of that information."

There are no cases cited in the Court's Order, but Defendant's Brief contains references to a number of cases on the issue of discovery of communications between attorneys and their expert witnesses.

The earlier post on this case, Azalea Garden Board & Care v. Vanhoy, involved an issue of discoverability of settlement agreements.

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Today, Judge Tennille issued a very short order in Azalea Garden Board & Care, Inc. v. Vanhoy, granting a defendant's Motion to Compel production of a settlement agreement entered into between the plaintiff and another defendant. 

I'm mentioning the case only because this is an issue that recurs with some frequency.  There's often a non-party which might have been a defendant but for a pre-litigation settlement, or a co-defendant, like in Azalea Garden, who settles during the course of the litigation.  It seems pretty clear that the terms of such a settlement are discoverable, even if a confidentiality provision is included. 

The Order was limited to the discoverability of the agreement, and expressly states that it was not a ruling on the admissibility of evidence.

There was a more detailed opinion, by Judge Diaz, on the discoverability of settlement agreements in Media Network, Inc. v. Mullen Advertising, Inc., 2006 NCBC 6 (N.C. Super. Ct. April 21, 2006).

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Bueche v. Noel, April 17, 2008 (Diaz)(unpublished)

How extensively can a deponent change her deposition testimony during her post-deposition review of the transcript?  Pretty extensively, it turns out, according to an opinion yesterday from the Business Court.

In Bueche v. Noel, a non-party deponent made fifteen pages of changes and additions to her deposition testimony on errata sheets. The defendant moved to strike the changed and added testimony. Among other things, the defendant argued in its brief that the deponent had used the deposition as a "take home exam" to write answers on which its counsel had no opportunity to cross-examine her.  (Links to the briefs are at the bottom of this post)

The federal courts are split on the scope of a deponent's right to correct or add to her deposition answers, as demonstrated by the parties' briefs.  There was no North Carolina appellate court precedent on the issue.

The Court looked to Rule 30(e) of the North Carolina Rules of Civil Procedure, which authorizes changes "in form or substance" to the deposition testimony, so long as the deponent signs "a statement reciting such changes and the reasons given . . . for making them."  The Court held that a deponent has the freedom to make any type of correction, whether as to form or substance, so the changes and additions were allowed. 

The new testimony didn't replace the previous testimony, however.  The Court held that the original answers would remain part of the record and could be used for impeachment or any other relevant purpose.  The Court also permitted the defendant to reopen the deposition on the limited subjects of the corrections made on the errata sheet, the reasons for those changes, and any reasonable follow-up questions.

The Court also ruled on another first impression issue of North Carolina deposition procedure:

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Harco Nat'l Ins. Co. v. Grant Thornton LLP, 2008 NCBC 5 (N.C. Super. Ct. March 4, 2008)(Tennille)

Plaintiff sent discovery regarding the Defendant accounting firm's insurance coverage.  In addition to obtaining information on the face amount of the policy, plaintiff also sought information on the other claims made under the policy and the amount of coverage left under the policy.  The Court rejected the argument that plaintiff was entitled to discovery on the other claims, because it would "lead to unnecessary argument over the policy limits."

The Court ruled, however, that plaintiff was entitled to the information regarding the coverage remaining, because "when it comes time to negotiate, the amount of liability coverage available to a defendant should be disclosed to the plaintiff." A plaintiff is entitled to the "true facts" about the amount of coverage, which means the actual amount remaining to be paid under the policy.

The Court also observed that a refusal to provide accurate information about liability insurance coverage at the time of mediation would not be mediating in good faith.

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