Opinion

Alison Frankel

E-discovery ruling in KPMG case: Brace for ‘profound’ impact?

By Alison Frankel
November 9, 2011

For all of its zeal in squelching what it considers unfounded class actions against U.S. businesses, the Chamber of Commerce rarely strays from appellate courts to venture into the weeds of a federal district court discovery dispute. But Monday, the Chamber filed an amicus brief in an uncertified wage-and-hour class action against the accounting firm KPMG, warning that if U.S. District Judge Colleen McMahon of Manhattan federal court adopts the order of a magistrate judge, the ruling will set “a dangerous precedent” that will be of “profound significance to businesses in America.” Piling on in their own Nov. 8 amicus brief, the Washington Legal Foundation and the International Association of Defense Counsel assert that the magistrate’s ruling could fundamentally distort class-action litigation by potentially making it cheaper to settle a case than to comply with discovery orders.

So what is this supposedly devastating, albeit preliminary, ruling? On Oct. 11, U.S. Magistrate Judge James Cott issued an order resolving a dispute between KPMG and Outten & Golden, the law firm representing two proposed classes of entry-level auditors who claim the accounting firm owes them overtime wages. The fight involved the computer hard drives of potential class members: KPMG and class counsel agreed that the plaintiffs could use sampling software to limit the electronic information KPMG would have to preserve, but they couldn’t agree on the sampling criteria or the number of computer hard drives to include in the sample. KPMG’s lawyers at Sidley Austin moved for an order limiting the sample size to 100 randomly selected hard drives.

Instead, Cott ruled that KPMG has to preserve the hard drive of every potential class member. “Prudence favors retaining all relevant materials,” Cott wrote, pointing to the seminal e-discovery ruling, Zubulake v. UBS Warburg. The magistrate judge reasoned that because McMahon, the district judge, hasn’t yet ruled on class certification in the KPMG audit associate case, every entry-level auditor in the opt-in action is a potential “key player” under Zubulake, whether in the Manhattan class action or in another case that could be filed depending on how McMahon ultimately defines the class.

“These audit associates are, at the very least, key players in any one of many potential actions that could result if the motion to certify is denied,” Cott wrote. “With so many unknowns involved at this stage in the litigation, permitting KPMG to destroy the hard drives is simply not appropriate at this time.”

The magistrate judge clearly expected to revisit the hard-drive preservation issue after McMahon rules on class certification, but KPMG nonetheless sent up a howl of protest in its Oct. 28 brief to the district judge. The audit firm said it has already spent $1.5 million to preserve the hard drives of about 2,500 potential New York class members who have left KPMG, at a cost of $600 per drive. Complying with Cott’s order, KPMG said, would cost millions more. More significantly, the Sidley lawyers wrote, Cott imposed a duty that would essentially preclude businesses from ever getting rid of anything.

“If companies were required to retain documents whenever there is a mere possibility that they could be sued, they effectively would face a perpetual duty to preserve and thus would be unable to implement document-retention policies,” the KPMG brief said. “The mere ‘potential’ that a hypothetical putative class member or opt-in plaintiff conceivably could file an individual suit at some time in the future if certification is denied cannot trigger a duty to preserve the hard drives of every member of the putative class or collective.”

The Washington Legal Foundation brief carried the KPMG argument to the next step: “By imposing a sweeping preservation order on a class-wide basis in a case that currently is limited to three named plaintiffs, the magistrate judge has imposed substantial costs that KPMG can avoid only by entering into a settlement agreement — thereby undermining the public policy favoring merits-based resolution of disputes.”

The Chamber of Commerce, represented by Wachtell, Lipton, Rosen & Katz, urged McMahon to step in so Cott’s order doesn’t set a “dangerous” precedent. “His decision, if not overturned, would exert an inordinate influence on how practitioners perceive the law,” the brief said. “Every decision on the subject of discovery is important, because courts so sparsely write about it, as discovery disputes tend to be fact-bound and often settled. More significantly, however, because of the threat of sanctions, a decision — like the magistrate judge’s — that overstates the duty of preservation will effectively become the law.”

Outten Golden was granted an extension until early December to respond to KPMG’s brief. I left a message for Outten partner Justin Swartz but didn’t hear back.

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