Is it ever appropriate to tap into someone else’s computer network in order to preserve documents for litigation?

An interesting decision from the 3rd U.S. Circuit Court of Appeals addresses this question, deciding whether a plaintiff’s attempt to preserve digital documents during litigation was appropriate under federal discovery rules or unlawful under state and federal computer anti-hacking statutes. In the Dec. 13 opinion, Joseph Oat Holdings, Inc. v. RCM Digesters, Inc., the court introduces the issue this way:

“This appeal involves an overlap between substantive claims under state and federal anti-hacking laws and alleged electronic discovery misconduct.”

The facts are somewhat involved, but I’ll give you the bullet-point version of what happened, as recounted in the court’s opinion:

• In February 2005, two wastewater-treatment companies, Biothane Corporation and RCM Digesters Inc., formed a joint venture, RCM Biothane.
• In June 2005, the computer networks of Biothane’s parent company, Joseph Oat Holdings Inc., and the joint venture, RCM Biothane, were connected via a virtual private network. Biothane employees in New Jersey administered the VPN and controlled the RCM Biothane server located in Oakland, Calif.
• In August 2006, the parties entered into a separation agreement purporting to end the joint venture. Evidence indicated that RCM continued to operate RCM Biothane after that date.
• In September 2006, Biothane sued RCM for trademark infringement, unfair competition, breach of contract, and various other counts.
• On Oct. 11, 2006, RCM’s attorney sent Biothane a litigation hold letter. On Oct. 20, he sent a second letter reiterating his request that Biothane preserve all electronic data.
• Around the same time that Biothane received the litigation hold letter, it began to systematically copy the files from the joint venture’s server, to which it still had access. Internal memos referred to this as the “information copy project” and instructed employees to do this “under the rader.” A Biothane V.P. later testified that he ordered the copying in response to RCM’s litigation-hold letter and believed he had a responsibility to preserve these files.
• When it discovered the copying, RCM, claiming the servers had reverted to its control, filed a motion to amend its counterclaim to add counts alleging violations of California, New Jersey and U.S. anti-hacking laws. RCM also filed a motion asking for discovery sanctions against Biothane for its copying of the files.

Ruling on the request for sanctions, a U.S. magistrate judge found that Biothane’s copying of the documents was “willful” but not in “flagrant bad faith.” He concluded that Biothane “accessed defendants’ computer to preserve business documents, not for the purpose of gaining an advantage in this litigation.” Finding that Biothane could have believed it was justified in accessing the documents, the magistrate judge imposed a fairly modest sanction of paying RCM’s costs, but not attorneys’ fees, incurred in discovery directed to finding out what documents were taken from RCM’s computer system.

Later, the U.S. district judge, addressing the parties’ cross-motions for summary judgment on the hacking claims, ruled in favor of RCM. He found that, at the time Biothane began copying the documents from RCM’s server, ownership of the server had reverted to RCM.

Substantive vs. Procedural

On appeal, the 3rd Circuit vacated the summary judgment order and remanded the case for further proceedings. In doing so, it held that the trial judge was wrong to focus on the ownership of the server. Even if ownership of the server had reverted to RCM, Biothane might still have had permission to access it, the court said.

More significantly, the 3rd Circuit said that the trial judge was wrong to base its summary judgment order in part on its finding that Biothane’s copying was not in response to RCM’s litigation hold letter. This finding required the trial judge to make a credibility determination about conflicting deposition testimony. While such a determination is appropriate with regard to ruling on sanctions for discovery misconduct, it is not appropriate when ruling on summary judgment.

Normally discovery misconduct is addressed through sanctions under the Federal Rules of Civil Procedure. Depending on the facts, early resolution of substantive anti-hacking claims arising from discovery misconduct may be necessary, but it may also impact the course of the litigation. Litigants may seek to use that tool to gain litigation advantage. Also, resolution of anti-hacking claims for misconduct during discovery short-circuits the normal course of litigation and permits litigants to obtain interlocutory review. … If the matter can be addressed in a discovery order, it can be reviewed along with the merits after final judgment, making for more efficient adjudication of claims.

The 3rd Circuit marked this opinion as “non-precedential.” Even so, it is notable given the court’s language cautioning that anti-hacking laws should not be used as tactical tools to gain an advantage in litigation, particularly at the discovery stage. When procedural e-discovery issues and substantive hacking laws clash, attorneys can use the situation to their advantage, the court suggests. A substantive ruling on a hacking issue enables the lawyers to bring an interlocutory appeal, rather than wait until the trial’s conclusion to address both procedural and substantive matters in a single appeal. That means additional delays, higher costs and greater uncertainty all around.