This is the third in a series of posts summarizing the 7 most important eDiscovery cases in Delaware in 2014.

Herbert Chen and Derek Sheeler v. Robert Howard-Anderson, Steven Krausz, Robert Abbott, Robert Bylin, Thomas Pardun, Brian Strom, Albert Moyer, Jeanne Seeley, and Occam Networks, Inc., C.A. No. 5878–VCL, Oral Argument on Plaintiffs' Motion to Compel Production of Documents by Defendants and Jefferies and for Sanctions Against Defendants and the Court's Rulings, September 4, 2014.

While the Chen v. Howard-Anderson case has been discussed in the corporate arena as an important case relating to Delaware fiduciary law, 102(b)(7) exculpatory provisions, and Revlon duties, the case also highlights the importance of transparency in the discovery process.  Chen is a reminder of how seriously the Courts in Delaware treat counsel’s discovery obligations.

In Chen, Defendant Occam, a Delaware corporation, agreed to a transaction in which Calix would acquire Occam.  The transaction was challenged by the Plaintiff stockholders, claiming that a few of the directors and officers involved in the transaction were not disinterested and had violated their duties to the company and the stockholders in agreeing to the acquisition.  Following the summary judgment phase, Plaintiffs raised various serious discovery issues and filed Motions to Compel against Defendants and third party Jefferies, who had been hired by Defendant Occam to assist in the transaction, and for Sanctions against the Defendants.

At issue in the discovery dispute were the Company’s 2012 financial projections which seemed suspiciously absent from the Company’s expedited discovery production and subsequent document productions.  Defendants had first told Plaintiffs that there were no 2012 projections, but it was clear from documents produced by third parties that responsive 2012 projection documents did exist.  Defendants then modified their explanation to say they had not relied on those projections, and eventually gave reasons why the documents were not produced, including that their collection had been limited to the documents existing on the Custodians’ hard-drives, that some of the documents did not hit on their search terms, and that some were incorrectly coded as not responsive.

While Vice Chancellor Laster agreed that the failure to produce the documents was sufficient to raise red flags and to “support inferences that go to people’s credibility,” he was not prepared to grant the Motion for Sanctions without a clearer understanding of what had happened throughout the Defendants discovery process.  Therefore, the Court ordered additional discovery on the discovery process.  Specifically, he ordered the Defendants to submit a “detailed and thorough” affidavit offered by one of the attorneys involved in the discovery process, as well as an additional document production.  The Court even permitted further depositions, all within 60 days.  He made it clear that the Plaintiffs had “to be able to understand what was done during the document collection process with specific focus on the 2012 projections, but it would likely be prudent not to try to limit it overly.”  The Plaintiffs, therefore, would need to be given the litigation hold letter sent to Defendants, the specific search terms that had been used during collection, and a copy of the document review protocol: whatever was necessary for a “transparent understanding of what went down in the document collection and review process”.  He further suggested that a neutral vendor be employed for this collection and review of the discovery on discovery.  While the Vice Chancellor acknowledged that there could be some privilege issues that the Defendants would need to raise, he made it clear that he did not consider search terms or the mechanics of how the collections were handled to be work product.

The case is a strong reminder that the Courts in Delaware will not hesitate to scrutinize a firm’s eDiscovery process if there is evidence of impropriety.  While sanctions have not yet been granted, Defendants necessarily spent a considerable amount of time and expense completing the discovery on discovery.  Transparency and cooperation on the part of all parties are recommended from the outset of every case.