The opinion of the court was delivered by: Andrew J. Peck, United States Magistrate Judge
Plaintiffs Gordon Partners, Frederick L. Gordon and Sam D. Gordon ("Gordon" or the "Gordon plaintiffs") have moved for discovery sanctions against defendant NTL Europe, Inc. and "nominal non-party NTL, Inc.," claiming that they hindered and delayed document discovery in this case and allowed numerous documents and electronically stored information ("ESI"), including the e-mails of approximately forty-four of NTL's "key players," to be destroyed. (02 Civ. 7377, Dkt. No. 30: Gordon Pls. Br.; 02 Civ. 7377, Dkt. No. 29: Notice of Motion & 4/11/06 Hermann Aff.) The Gordon plaintiffs request that the Court impose a range of sanctions, including an adverse inference order for fact finding purposes during summary judgment or trial, and payment of attorneys' fees and costs relating to this motion and the document discovery process. (E.g., 4/11/06 Hermann Aff. ¶ 47.) The Court heard oral argument on the motion on January 29, 2007.
For the reasons set forth below, the Gordon plaintiffs' sanctions motion is GRANTED in substantial part. That is, the Court imposes an adverse inference instruction and awards the Grodon plaintiffs attorneys' fees for the motion and the additional discovery costs caused by defendant NTL Europe's conduct.
The Securities Lawsuits and NTL's Bankruptcy
The class-plaintiffs filed suit on April 18, 2002 against a company then known as NTL, Inc. ("Old NTL"), alleging federal securities laws violations. (See 02 Civ. 3013, Dkt. No. 1: Class Compl.; see also 02 Civ. 3013, Dkt. Nos. 21, 25 & 28: Consolidated & Am. Compls.) The Gordon plaintiffs filed their complaint on September 13, 2002. (02 Civ. 7377, Dkt. No. 1: Compl.)
Old NTL and several of its subsidiaries entered into Chapter 11 bankruptcy, emerging on September 5, 2002 with a "Second Amended Joint Reorganization Plan of NTL Incorporated and Certain Subsidiaries" (the "Bankruptcy Plan"). (02 Civ. 7377, Dkt. No. 29: 4/11/06 Hermann Aff. Ex. A: Bankruptcy Plan.) Two main companies emerged out of the bankruptcy: NTL Europe, Inc. ("NTL Europe"),*fn1 the successor company to Old NTL, and NTL, Inc. ("New NTL"), formerly known as NTL Communications Corp. (E.g., Bankruptcy Plan at 31-32.) NTL Europe was primarily responsible for selling off Old NTL's unprofitable assets, and New NTL became the surviving operational company with control of the company's European telecommunications assets. (See 4/11/06 Hermann Aff. ¶ 3; see generally Schwartz Aff. Ex. 3: Bankruptcy Disclosure Statement.)*fn2
The Bankruptcy Plan specifically allowed the Gordon plaintiffs' and class plaintiffs' securities lawsuits to go forward after the bankruptcy, against the individual defendants and NTL Europe (as successor to Old NTL), but only to the extent of NTL Europe's insurance coverage. (Bankruptcy Plan at 15-16, 50-52; 02 Civ. 7577, Dkt. No. 33: Schwartz Aff. Ex. 11: 6/13/03 Bankruptcy Order at 2; see 4/11/06 Hermann Aff. ¶ 2.)
Document Sharing Clauses in The Demerger Agreement and Transitional Services Agreement Pursuant to the Bankruptcy Plan, defendant NTL Europe and non-party New NTL entered into a "Demerger Agreement" dated January 10, 2003, which specifies that:
For a period of ten years from the date of this Agreement, each party shall . . .
allow the other party and its personnel to have access to (during normal business hours and following not less than 48 hours' notice) and (at the expense of the party requesting the information) take copies of all documents, records or other materials containing any information which that party or any of its Group Companies or affiliated joint ventures might reasonably require to be able to comply with their respective legal, regulatory, accounting or filing obligations, or to resist, appeal, dispute, avoid or compromise any tax assessment, provided that nothing in this clause shall permit either party to copy any document, record or other material which is subject to legal privilege. Furthermore, each party shall . . . allow reasonable access to such of its duly authorised personnel, at all reasonable times during business hours upon prior written notice, as are required to permit the availability, access or, subject to the above restriction, copying of such information.
(02 Civ. 7377, Dkt. No. 33: Schwartz Aff. Ex. 12: Demerger Agmt. ¶ 4 at p. 5, emphasis added.)*fn3
Also pursuant to the Bankruptcy Plan, defendant NTL Europe and non-party New NTL entered into a January 10, 2003 "Transitional Services Agreement," in which the parties stipulated that they would provide certain services to each other in order to smooth the transition after the companies emerged from bankruptcy. The Transitional Services Agreement specifically provided that:
The Services Provider [New NTL] shall provide the Services Recipient Group Companies [NTL Europe and its subsidiaries], or procure that the Services Recipient Group Companies are provided, with such information and records in relation to the Services as the Services Recipient [NTL Europe] may from time to time reasonably request and, without prejudice to the generality of the foregoing, the Services Provider shall use its reasonable commercial efforts to respond during Business Hours, orally or by telephone, facsimile transmission or in writing (as appropriate) to any request for further information made by the Services Recipient [NTL Europe].
(02 Civ. 7377, Dkt. No. 33: Schwartz Aff. Ex. 4: Transitional Services Agmt. ¶ 2.5 at p. 8.)
In a list of "Services" to be provided under the Transitional Services Agreement, under a heading for "Legal," the agreement states that "Euroco's [NTL Europe's] legal counsel shall have access to New NTL's legal department for the purpose of inquiring about historic transactions." (Transitional Services Agmt. at p. 33.)*fn4
Old NTL's 2002 Document Hold Memoranda
On March 13, 2002, a document "hold" memo was circulated to approximately seventeen employees of Old NTL:
Although, under usual circumstances, destruction of documents/files, in the ordinary course is permitted, under certain circumstances, a company is under a duty to preserve documents that could be relevant to disputes with third parties. Basically, what this means is that you can have a policy that dictates which and when documents can be destroyed in the ordinary course, but once you are on notice that there may be litigation you are required to retain documents that would reasonably constitute evidence even if under your retention policy you would destroy such documents in the ordinary course.
Accordingly, given the obvious possibility that we may encounter a heightened risk of litigious activity in the ongoing restructuring process, it is imperative that all documents that even possibly could be evidence in any such a matter be retained.
(02 Civ. 7377, Dkt. No. 29: 4/11/06 Hermann Aff. Ex. T.) On March 14, 2002, the same memorandum was forwarded to approximately twenty-eight more employees at Old NTL with the following instruction: "Please read and note carefully Lauren Blair's (Assistant General Counsel in New York) memorandum on the retention of documents. Please forward to your reports as you consider appropriate. Many thanks." (4/11/06 Hermann Aff. Ex. T.)
On or about June 6, 2002, while Old NTL was in bankruptcy, another document hold memorandum about the Gordon and class action lawsuits was circulated to employees. (See 02 Civ. 7377, Dkt. No. 33: Schwartz Aff. Ex. 5: 6/6/02 Document Hold Memo.) The memo stated in part:
NTL Incorporated and certain of its officers have been named as defendants in a number of purported securities class action lawsuits. The complaints in those cases generally allege that NTL failed to accurately disclose its financial condition, finances and future prospects in press releases and other communications with investors prior to filing for reorganization in federal bankruptcy court.
We presently do not know of any facts that would support these allegations, and we intend to defend the lawsuits vigorously.
In connection with such lawsuits, NTL and its affiliates may be required to produce documents relevant to plaintiffs' claims. Therefore, as we have previously informed you, we are required to take reasonable steps to preserve all potentially relevant material that may exist (whether in paper or electronic format). Relevant materials may include sales data, minutes or notes of meetings or conversations, financial statements, credit facilities and other loan documents, press releases, PowerPoint presentations and any other documents (including drafts) relating to the business, assets, properties, condition (financial or otherwise), and results of operations of NTL or its affiliates at any time after April 1, 1999.
Please ensure that these types of documents are preserved until further notice. When in doubt about possible relevance, you should err on the side of retaining the material. (Schwartz Aff. Ex. 5: 6/6/02 Document Hold Memo, emphasis added.)
A Brief History of Discovery in this Case Relevant to this Motion
On May 2, 2005, the Gordon plaintiffs and class plaintiffs (collectively, "plaintiffs") served their initial document requests upon defendant NTL Europe and the individual defendants. (02 Civ. 7377, Dkt. No. 29: 4/11/06 Hermann Aff. ¶ 5 & Ex. B.) On June 1, 2005, defendant NTL Europe and the individual defendants filed their objections and responses. (4/11/06 Hermann Aff. ¶ 5 & Exs. C & D.) Defendant NTL Europe's response to the document requests stated that "NTL will produce documents, if any, responsive to [the] request." (4/11/06 Hermann Aff. Ex. C.) Defendant NTL Europe, however, did not produce any responsive documents or e-mails. (4/11/06 Hermann Aff. ¶ 7.) Defendant NTL Europe's counsel informed plaintiffs' counsel that all corporate records relating to the 1999-2002 pre-bankruptcy period were in non-party New NTL's possession and that defendant NTL Europe did not possess any of these records. (4/11/06 Hermann Aff. ¶ 7.)
George Blumenthal was the only individual defendant who produced any documents. (4/11/06 Hermann Aff. ¶ 6.) Blumenthal had material because he had requested and obtained copies of his e-mails upon leaving his employment with Old NTL, some of which were probative of plaintiffs' allegations in this case. (See 4/11/06 Hermann Aff. ¶ 6.) Many of the probative e-mails are dated during 2001, the primary year involved in plaintiffs' allegations, and relate to NTL's accounting procedures. (See 4/11/06 Hermann Aff. ¶ 6.)
On August 16, 2005, plaintiffs served a subpoena upon non-party New NTL requesting production of essentially the same documents as plaintiffs had requested from defendant NTL Europe. (4/11/06 Hermann Aff. ¶ 8 & Ex. F.) Approximately two months later, non-party New NTL made seventy boxes of documents available to plaintiffs' counsel for inspection and copying. (4/11/06 Hermann Aff. ¶ 8; see 02 Civ. 7377, Dkt. No. 35: Rodburg Aff. ¶ 12.)
On November 21, 2005, plaintiffs' counsel sent a letter to New NTL's counsel noting that New NTL had not produced several requested categories of documents, including financial analyses, subscriber integration and billing issues, and e-mail. (4/11/06 Hermann Aff. ¶ 9 & Ex. G.) On November 30, 2005, New NTL's counsel responded that New NTL does "not believe responsive documents that fall into the categories of documents which you reference in your letter as missing exist and/or can be produced," and concluded that in light of its "limited role" in the litigation, New NTL's production was "full and complete." (4/11/06 Hermann Aff. ¶ 10 & Ex. H.) New NTL's counsel also orally told plaintiffs' counsel that "responsive e-mails did not exist because the company's [computer] servers had been 'upgraded' after the reorganization." (4/11/06 Hermann Aff. ¶ 11.)
On December 6, 2005, plaintiffs' counsel served a subpoena upon non-party New NTL for a Rule 30(b)(6) deposition regarding New NTL's document production, and, after several scheduling difficulties, a deposition was scheduled for January 25, 2006. (4/11/06 Hermann Aff. ¶ 13 & Ex. K.)
On December 20, 2005, plaintiffs' counsel took a Rule 30(b)(6) deposition of Jeffrey Brodsky, defendant NTL Europe's CEO. (4/11/06 Hermann Aff. ¶ 12 & Ex. I: Brodsky Dep.) Brodsky testified that NTL Europe does not have physical possession of Old NTL's books and records. (4/11/06 Hermann Aff. ¶ 12 & Brodsky Dep. 46-50.) Because non-party New NTL retained the operating telecommunications assets after the bankruptcy, New NTL had physical possession of the books and records. (4/11/06 Hermann Aff. ¶ 12 & Brodsky Dep. 52-53.) This was the reason that defendant NTL Europe did not produce any documents in response to plaintiffs' May 2, 2005 subpoena. (4/11/06 Hermann Aff. ¶ 12 & Brodsky Dep. at 61.) Brodsky testified that he did not know whether defendant NTL Europe ever requested responsive documents from non-party New NTL or its counsel despite the information sharing clauses in the Demerger Agreement and Transitional Services Agreement and despite Brodsky's statement that "[w]henever there was a document that we needed [from New NTL], we would call [New NTL] and ask if they had it, and if they had it, they'd send it." (4/11/06 Hermann Aff. ¶ 12 & Ex. I: Brodsky Dep. 51-55, 60-62.)*fn5
In a letter dated January 24, 2006, New NTL's counsel disclosed to plaintiffs' counsel that New NTL had performed selected, targeted searches of 23,000 boxes of files in storage in four locations in the United Kingdom and had located no additional responsive documents, and further asserted that reviewing every box in storage to locate documents responsive to plaintiffs' document requests would be "overly burdensome, unreasonable, unrealistic and extraordinarily costly for [non-party] NTL." (4/11/06 Hermann Aff. ¶ 15 & Ex. O at 2.) New NTL offered to provide plaintiffs' counsel with an index of the 23,000 storage boxes and allow plaintiffs' counsel to perform an on-site review of any boxes on a per-box and per-day cost to plaintiffs. (4/11/06 Hermann Aff. Ex. O at 3.)
New NTL also offered to perform targeted searches for the e-mail accounts of current and former NTL employees as requested by plaintiffs, at a specific cost to plaintiffs for each account downloaded. (Id.) New NTL also notified plaintiffs that electronic documents and e-mail of current and former NTL employees who worked in New York had been on a server in New York that was shut down in 2003 after the companies' emergence from bankruptcy, and the electronically stored information was transferred to a new server in the UK. (Id. at 4.) New NTL located the information on the new server in the UK and downloaded it onto three DVD's, which it sent to plaintiffs. (Id.; see also Rodburg Aff. ¶ 18.) Additionally, New NTL found a collection of computer back-up tapes for the New York server. (4/11/06 Hermann Aff. Ex. O at 4.) New NTL stated that its IT department was working with a vendor to determine the cost that plaintiffs would have to pay to access the information on the tapes to produce the information stored on them. (Id. at 4-5.) On January 25, 2006, New NTL's counsel sent a letter to plaintiffs' counsel with more information regarding the forty-six back-up tapes, and estimating how much plaintiffs would need to pay to restore the back-up tapes. (4/11/06 Hermann Aff. ¶ 17 & Ex. R at 1-2.)
At the January 25, 2006 New NTL Rule 30(b)(6) deposition, David Bond, a New NTL in-house lawyer testified that New NTL's IT system was outsourced to IBM in late 2002 or early 2003. (4/11/06 Hermann Aff. ¶ 18 & Ex. S: Bond Dep. 66; see also Rodburg Aff. ¶ 8.) Bond did not know what the e-mail retention policy was at the time of the outsourcing to IBM; IBM's current e-mail retention policy with respect to a former employee's e-mail account is that New NTL's IT department has access to the account for three months after an employee leaves the company, then it goes to a back-up tape for nine months, after which it may be overwritten. (Bond Dep. 67.) Bond testified that the policy with regard to the e-mail accounts of current New NTL employees is that employees are free to retain e-mails or discard them "to suit their needs." (Bond Dep. 68.) In order to retain an e-mail, an employee must move the e-mail from their inbox to a separate folder, otherwise the e-mails in the inbox will start to be deleted after approximately three months. (Bond Dep. 68-69.) Bond stated that employees received new computers at the time of the outsourcing to IBM, and he did not know whether e-mails written on the old computers were placed on back-up tapes as part of the outsourcing. (Bond Dep. 69-71.) Bond was not aware of any communications within New NTL at the time of the outsourcing to IBM regarding retention of e-mail or documents pertinent to ongoing litigation. (Bond Dep. 71-72.)
Bond testified that he first became involved with responding to plaintiffs' August 15, 2005 subpoena to New NTL in December 2005. (Bond Dep. 77-79.) Bond asked an assistant to work with New NTL's IT head to locate electronic files for the individual defendants, and also requested that she locate physical documents in the UK offices where the individual defendants may have worked. (Bond Dep. 79-81.) The assistant later notified Bond that the IT department was only able to find certain incoming e-mails for George Blumenthal, but that there were no other electronic files for Blumenthal or the other individual defendants because they were not on any NTL servers. (Bond Dep. 82-83.) Bond testified that the New York employees, with the exception of Stephen Carter, did not have outgoing e-mail accounts on the NTL servers because they had used outside service providers for their e-mail. (Bond Dep. 84-85.)
Bond testified that at the request of New NTL's in-house legal director, the assistant and the IT department also searched for e-mails and electronic documents relating to other individuals that had been requested by plaintiffs' counsel. (Bond Dep. 98-101.) Those searches were completed the week before Bond's deposition. (Bond Dep. 101.) Bond did not know of any electronic searches that were performed at New NTL in relation to this litigation prior to the searches overseen by the assistant. (Bond Dep. 103.) Bond testified that back-up tapes for New NTL's UK servers are done annually, but they are overwritten the following year, so "there is only ever one backup tape in existence at one time." (Bond Dep. 103.) Bond stated that New NTL also creates daily back-up tapes, but that those back-up tapes usually are overwritten. (Bond Dep. 104.) Bond said that the first time he learned that some of the information from the New York servers had been moved to the UK server was in December 2005. (Bond Dep. 104.)
On January 31, 2006, the Gordon plaintiffs' counsel requested an extension of the discovery deadline because of New NTL's failure to produce documents and e-mails, which this Court granted on February 2, 2006. (4/11/06 Hermann Aff. ¶ 26 & Ex. W, Ex. X at 17.)
On February 3, 2006, plaintiffs' counsel sent New NTL a list of fifty-eight present and former NTL employees whose e-mails plaintiffs wished to have searched. ...