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Aug 27 2010

Kings of E-storage Fined For Losing Emails

Sandisk, the multi-billion dollar company, that is the king of electronic storage devices, was just hit with $150,000.00 fine for losing emails related to litigation its involved in with two former employees.  The case Harkabi v. Sandisk is a warning to all companies not to destroy e-documents if there is any threat of litigation and is a message to those who would have claims against such companies to write letters immediately upon the possibility of a claim demanding preservation of such material.

The case arose in  2004, when the plaintiffs sold a software company they had founded in Israel to SanDisk for $10 million up front. An additional $4 million was to be paid depending on the level of sales SanDisk realized over the next two years on products “derived” from technology developed by the Israeli company. As part of the deal, the plaintiffs moved to New York and began working for SanDisk.

At the end of the two-year period, SanDisk contended the threshold for the  software developers to claim their “earn-out” fee had not been met, and offered them $800,000. When the developers continued to demand the full $4 million, SanDisk ended their employment. They sued.

One of the key issues in the suit is whether a SanDisk flash drive called “U3” contained software “derived” from a product the plaintiffs before joining the company. The plaintiffs were sure that their emails would establish that it was derived from their earlier work.   They served a discovery demand asking for (among other things)  all of their emails from the 17 months they worked there.

SanDisk produce 1,400,000 documents

In response to the document demand, Sandisk produce 1.4 million documents. Yes, 1,400,000 individual documents. This is an expansion of on old trick in complex litigation, which is you bury  bad evidence in piles and piles of material hoping the other side won’t find it. In the 60s when Atty General Robert F. Kennedy subpoened the records of the Teamsters in an investigation on Mob-involvement in unions, the Teamsters answered by producing tractor trailers full of material. The investigation died immediately thereafter.

Sandisk was not as lucky. Why not? The plaintiffs themselves developed a software program designed to go through the documents to find emails!! There program found that Sandisk produced no emails at all. When asked to explain why the company responded that the two laptops belonging to the plaintiffs had been redistributed and given to two new employees and that they thought they had successfully transferred the emails to flash drives but that they found that they did not properly transfer them.   That’s right, the number one maker of flash drives told a federal judge they couldn’t transfer emails to a flash drive properly.  The judge, William Pauley of the Southern District of New York, noted that SanDisk’s  “size and cutting edge technology raises an expectation of competence in maintaining its own electronic records.”  In other words, he wasn’t buying it. He not only fined the company the $150K to compensate the plaintiff’s for their legal fees in pursuit of the emails, he also ordered that a jury would be told they could make a negative inference  against Sandisk at trial from their loss of the emails. Sandisk is now scrambling to try and retrieve it form back-up files.

Message

This one case has lots of messages in it for litigators and litigants alike. The plaintiffs certainly send a message about the value of ingenuity, perseverance and persistence. Its also a cautionary tale to companies to be ultra-careful in responding to discovery accurately.  E-discovery was a cutting-edge issue a decade ago.  It no longer is.  All parties are expected to be able to store, reproduce and exchange emails, internal memos saved only digitally and other forms of electronic material.  Failure to do so will likely cause you to suffer serious consequences.

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