Health Net exacerbated its lack of candor to this Court and discovery misconduct to Plaintiffs in events surrounding the promised “Second Restitution.” The “Second Restitution” is a term coined by the parties to refer to Health Net's representation to this Court at the Preliminary Injunction hearing on November 20, 2003 that Health Net had reached an agreement with NJ–DOBI to repay claims improperly processed between June 1999 and July 2001.
Testimony at the Rule 37 Hearing revealed that this Court's subsequent decision to hold a Preliminary Injunction hearing on November 20, 2003 caused a flurry of concern within Health Net. On November 20, 2003, about an hour before the Preliminary Injunction hearing commenced, HNNE General Counsel Dominianni placed a call to Lee Barry, Esq. at NJ–DOBI. The phone lines connected for seven minutes, including the time necessary for a secretary to get Mr. Barry on the line. Thus, the conversation was extremely short. Mr. Dominianni testified that he told Mr. Barry that Health Net had “a problem” from January 1, 1999 to July 2001; that the company intended to resolve it; that Mr. Barry concurred; and that an agreement to make the “Second Restitution” was formed. Mr. Barry testified that nothing substantive was disclosed by Health Net during the short call; that there was no representation by Mr. Dominianni about any further restitution; and that no agreement of any kind was made in the very short phone call. Significantly, Mr. Dominianni made no follow-up letter, e-mail, nor conversation of any kind to discuss, confirm, or conclude any agreement of any kind with NJ–DOBI, a large administrative agency of the State of New Jersey. This Court finds that no agreement to make a “Second Restitution” was made between Health Net and NJ–DOBI.
Within a few hours of this phone call, McCarter & English partner John Pendleton, Esq. assured this Court at the Preliminary Injunction hearing that no injunctive relief was necessary because Health Net had agreed to a “Second Restitution” with NJ–DOBI for the earlier period of outdated data. Mr. Pendleton stated: “Health Net has since gone back to the New Jersey department, and there may be either an amendment to the consent order, or a separate—there is no investigation. We made disclosure that there are—we've discovered that in 1999 we hadn't paid, and so we're going to rectify that, that's about a $528,000 restitution program that we'll make to small group people in New Jersey.” Ms. O'Donnell testified on November 20, 2003 that “we have gone back to the department [NJ–DOBI] to say that we have uncovered other errors and that we would propose, and they accepted our plan of remediation.” Pendleton testified that he made these representations based on Dominianni, Esq.'s phone call an hour earlier. O'Donnell later testified at the Rule 37 Hearing that she was told what to say by Pendleton.
Shortly after the November 2003 hearing, Health Net submitted an affidavit by CFO Pennell Hamilton dated January 15, 2004. He averred, under oath, that “as soon as representatives of Health Net of New Jersey, Inc. understood that Health Net of New Jersey, Inc. did not load the 1999 PHCS database and that it did not update the PHCS database within 60 days of receipt of the database, these representatives went to the New Jersey Department of Banking and Insurance (‘NJ–DOBI’) and notified the Department of this issue.” Documents never produced in discovery (and only revealed *90 upon inquiry of this Court during the Rule 37 hearing) show that Mr. Hamilton himself knew that Health Net had used outdated data in 1999 for UCR-based reimbursements at the very time that Ms. O'Donnell was making representations to NJ–DOBI that the use of outdated data began in July 2001. No notification was made to NJ–DOBI “as soon as” the dereliction was understood by Health Net's CFO. The Hamilton affidavit was false.
During the year following the November 20, 2003 hearing, Health Net submitted briefs and letters claiming that the Second Restitution was “in the process” of being carried out. However, there is no evidence, during the entire year after the November 20, 2003 hearing, that any “process” for carrying out the Second Restitution ever took place. Outside counsel knew that. Inside counsel knew that. And Health Net knew that. At the Rule 37 Integrity Hearing, Mr. Dominianni testified vaguely that he “reached out” to several unidentified “IT people” at Health Net but that he never received any work product from those individuals and did nothing. This pattern of non-action continued for over a year. In an attempt to explain this inaction by Health Net to effectuate the promised Second Restitution, Dominianni, Esq. testified that “at the time [he] thought there was some chance that Mr. Barry may follow up and some chance that he may not.” He further testified that he did not follow up with Mr. Barry to confirm or memorialize any agreement.
Outside counsel at McCarter & English repeatedly asked the client's inside general counsel to do something to honor the representations being made to this Court. Yet Heath Net did not communicate further with NJ–DOBI for more than a year nor did it ever commence a process for making a Second Restitution. Then the alarm went off.
On December 10, 2004, Plaintiffs wrote to the Court expressing their frustration and disbelief at the amount of time it was taking to commence the Second Restitution. On December 13, 2004, Magistrate Judge Shwartz began a series of conferences with the parties regarding various discovery matters and about the progress, or lack thereof, of the Second Restitution. The Court issued an Order demanding an explanation for why, over a year after it was promised in this Court's hearing, the Second Restitution had still not happened. Mr. Dominianni and others within HNNE then sprang into action for the first time. On December 14, 2004, a day after the first conference with Magistrate Judge Shwartz, Dominianni began a project brief to identify ONET claims that were paid at outdated HIAA fee schedules in New Jersey between January 1, 1999 and June 30, 2001; to recalculate the payments at the updated HIAA fee schedule; and to issue refund checks to members. The project brief required the identification of all claims—including the original, reprocessed, and refund amounts—by Friday, December 17, 2004, just three days later. In other words, the job was short and could be done in just three days.
In an effort to make it appear that the Second Restitution had been underway all along, Mr. Dominianni submitted an affidavit to this Court on January 4, 2005, blaming the failure to accomplish the Second Restitution on the great amount of work needed to complete the task and on “inadequate continuity of work flow and personnel.” The affidavit failed to state that no work had been done to commence the restitution for over a year until Magistrate Judge Shwartz demanded an explanation. The affidavit also failed to state that by the date of the affidavit, Mr. Dominianni knew that the “work,” i.e.
the calculations for the Second Restitution, had already been done two years earlier. This Court finds that Mr. Dominianni's Certification was misleading. Outside counsel Pendleton, whose firm submitted the affidavit to this Court, testified that it was misleading. In explaining its own role in submitting the misleading affidavit, McCarter & English stated that its role was merely as “scrivener.”
As described above, throughout this litigation Plaintiffs sought information about the Defendants' use of certain databases for calculating beneficiaries' reimbursement for ONET medical bills. Plaintiffs repeatedly demanded documents on this issue, and Magistrate Judge Shwartz repeatedly ordered Defendants to produce such documents. Yet Defendants never disclosed the most revealing documents on the topic during discovery. Deprived of relevant discovery, Plaintiffs had no way to know that high-level officials within Health Net had known about the company's use of outdated data extending back to 1999 when they were negotiating with NJ–DOBI to reimburse members. The most incriminating e-mails revealing these officials' *103 knowledge did not emerge until this Court posed pointed and probing questions to outside counsel at the Rule 37/Integrity Hearing. Only then, did Health Net “elect to restore certain limited e-mail files from their legacy e-mail systems for current and former employees who appear[ed] to be central” to the hearing. See
November 10, 2005 Letter of Herve Gouraige at 2. And even then, that search was of one official's e-mails for a mere two month period.
When considering whether to deem facts admitted as a sanction for litigation misconduct, this Court uses a sliding scale and balances: “(1) culpability (including willfulness and bad faith, and whether the client was responsible or solely the attorney); (2) prejudice; and (3) whether lesser sanctions would have been effective.” Estate of Spear, 41 F.3d at 111. In such a balancing, the prejudice factor subsumes the requirement that the sanction be specifically related to the claim at issue. Id. Willfulness and bad faith are not prerequisites for imposing this sanction but their presence will enhance the case for sanctions. Id. at 112. The imposition of sanctions in the absence of bad faith generally requires a strong showing of prejudice. Id. at 116.
The evidence shows that Health Net itself, acting through its officials and in-house counsel, chose not to disclose highly relevant discovery about Health Net's use of outdated data to shave UCR rates and thereby reduce reimbursements to beneficiaries. Health Net concealed key facts about its dealings with NJ–DOBI on the issue. Health Net employed an electronic mail policy that did not permit employees to search emails that were more than 90 days old, unless employees affirmatively and independently chose to save and archive those emails. No notice was timely broadcast to relevant employees to save their e-mails. Yet outside counsel resisted a preservation order. Health Net itself did not conduct independent searches of stored emails and did not so inform its outside counsel (other than Epstein Becker, who entered the litigation after discovery was concluded). Thus, when outside counsel asked employees to search for emails in response to Plaintiffs' document requests and Court Orders, that counsel did not know from Health Net that these employees could not access “historic” e-mail beyond the most current three month period. Furthermore, even though one employee, Ms. O'Donnell, herself retained e-mails by overriding the automatic archive system, her files from the relevant time period were not thoroughly searched to respond to Plaintiffs' discovery requests.
Thus, even when Health Net employees could search their emails, their searches were sporadic rather than systematic.
The content of the undisclosed emails leads compellingly to the inference that Health Net wilfully and in bad faith concealed those emails from Plaintiffs. Many of the emails demanded by the Court at the Rule 37 Hearing revealed that top level Health Net officials knew that Health Net had used outdated data to calculate UCR as early as 1999, failed to disclose this knowledge to NJ–DOBI, and thus made the misleading claim of “recent discovery” to this Court and Plaintiffs. For example, Integrity 99, which was revealed for the first time during the Integrity Hearing, contained hand-written notes by Health Net's Director of Finance from an October 2002 meeting of high-level Health Net personnel about the HIAA back-dating issue. The notes indicate that the meeting participants, including Eileen O'Donnell, Esq. and CFO Pennell Hamilton, had discussed Health Net's failure to load the 1999 HIAA database and the resulting potential liability for the use of outdated data for that time period. Plaintiffs questioned Ms. O'Donnell, Mr. Hamilton, and the Director of Finance about the notes and the meeting for the first time at the Rule 37 Hearing. Each witness claimed to have no meaningful knowledge or memory of the meeting's substance. Thus, the non-production of this document during discovery deprived Plaintiffs of the chance to question three witnesses whose memory in 2002–2003 would have been fresher than in late 2005.
*104 Two months later in the Integrity Hearing, Integrity 168 came to light. Integrity 168 clarified the notes in Integrity 99 and confirmed that these witnesses had integral roles in assessing the liability risk of using outdated HIAA data. They discussed plans to “wash away the sins of the past” and to “go forth and sin no more.” Plaintiffs never had the chance to question the witnesses on this incriminating document. These emails directly contradicted the Health Net CFO's affidavit that swore under pains and penalties of perjury that as soon as representatives at Health Net realized that the company had used outdated data going back to 1999, they disclosed this to NJ–DOBI. The interference of wilful non-production and bad faith in failing to comply with discovery obligations is unavoidable.
The systemic pattern of non-production seriously prejudiced Plaintiffs and wasted judicial resources. Even during the Integrity Hearing itself, Plaintiffs did not have Integrity 168 when questioning the key HIAA meeting participants and thus could not probe their claimed lack of knowledge about Integrity 99. Plaintiffs did not have key information about Health Net personnel's knowledge of outdated data in 1999 to challenge Health Net counsel's statements to the Court, repeatedly, that the early malfeasance had just “recently” been discovered. Plaintiffs did not have the documents during countless depositions, nor when filing their summary judgment motions. This information relates directly to Plaintiffs' claims that Health Net breached its fiduciary duties to beneficiaries. Defendants' wilful non-disclosure gave them a clear litigation advantage. Plaintiffs will never be able to use the documents effectively now, when witnesses' memories have faded.
In light of the significance of the documents withheld from Plaintiffs, the deliberate and wilful nature of the non-disclosure, and the prejudice suffered by Plaintiffs, this Court finds that aggressive sanctions are necessary to remedy the harm done to Plaintiffs, to punish Defendants for their behavior, and to make clear that such litigation tactics will not be condoned. Thus, this Court will deem established for the purposes of this litigation the facts found in this Opinion regarding Health Net's knowing and wilful use of outdated data; Health Net and its officials' actions to hide the full scope of its conduct from NJ–DOBI; Health Net's false claims of “recent discovery” of the 1999–July 2001 malfeasance to avoid injunctive relief; Health Net's false claim that a Second Restitution was negotiated with NJ–DOBI; Health Net's false statement that a Second Restitution was “in progress;” and Health Net's false affidavit by General Counsel Dominianni in an attempt to cover up the prior misstatements to this Court. These facts will be deemed admitted for all purposes, including equitable relief.
Defendants gave approximately 20,000 pages of previously unproduced discovery to Plaintiffs in the form of documents attached to certifications in support of Health Net's June 10, 2005 motion for summary judgment and as designated trial exhibits. Plaintiffs move to strike the exhibits because the vast quantity of the documents were never produced during discovery.
Rule 37(c)(1) provides that “[a] party that without substantial justification fails to disclose information required by Rule 26(a) or 26(c)(1), or to amend a prior response to discovery as required by Rule 26(c)(2), is not, unless such failure is harmless, permitted to use as evidence at trial, at a hearing, or on a motion any witness or information not so disclosed.” Rule 37(c) was revised in 1993 to provide a self-executing sanction for the failure to make a disclosure required by Rule 26(a) without the need for a motion under Rule 37(a)(2)(A). It was further amended in 2000 to add failure to comply with Rule 26(c)(2) as a ground for sanctions. “This automatic sanction provides a strong inducement for disclosure of material that the disclosing party would expect to use as evidence, whether at trial, at a hearing, or on a motion, such as one under Rule 56 [for summary judgment.]” Advisory Committee's notes to 1993 Amendments.
In deciding whether to impose sanctions against Defendants under Rule 37(c)(1), this *105 court considers: (1) prejudice or surprise to the Plaintiffs; (2) the ability of Plaintiffs to cure the prejudice; (3) the likelihood of disruption; and (4) the Defendants' bad faith or unwillingness to comply. See
Newman v. GHS Osteopathic, Inc., 60 F.3d 153, 156 (3d Cir.1995). These factors are nearly identical to the factors this Court considers when deciding to exclude evidence under Rule 37(b)(2):43 (1) the prejudice or surprise to Plaintiffs; (2) the ability of Plaintiffs to cure that prejudice; (3) the extent to which the evidence would disrupt the orderly and efficient trial of the case or other cases in the court; and (4) bad faith or willfulness of Defendants in failing to comply with the court's order. See
Meyers v. Pennypack Woods Home Ownership Ass'n, 559 F.2d 894 (3d Cir.1977) (overruled on other grounds,
777 F.2d 113 (3d Cir.1985)).
Plaintiffs certainly suffered surprise. Plaintiffs' counsel repeatedly asked Defendants' counsel during the several years of discovery whether Defendants had completed their production. Defendants had numerous opportunities during that time to notify the Plaintiffs about any impending document production, even as late as when they submitted their Final Pretrial Order exhibit list. However, Defendants remained silent, allowed discovery to close, and submitted their final exhibit list, which included 8,000 never-disclosed pages as trial exhibits. Additionally, for the first time in their June 10, 2005 Summary Judgment motion, Defendants decided to drop another 12,000 non-disclosed pages. There was not even the courtesy of telling Plaintiffs that the 20,000 pages were never produced in discovery.
Plaintiffs also suffered prejudice. Prejudice from an adversary's failure to file a timely or adequate discovery response may include the irretrievable loss of evidence, the inevitable dimming of witnesses' memories, or the excessive and possibly irremediable burdens or costs imposed on the opposing party. Scarborough v. Eubanks, 747 F.2d 871, 876 (3d Cir.1984). All of this prejudice occurred in this case. Prejudice need not be irremediable, even in the context of dismissal or default, and may include the burden imposed by impeding a party's ability to prepare effectively a full and complete trial strategy and the burden a party must bear when forced to file motions in response to the strategic discovery tactics of an adversary. Ware v. Rodale Press, Inc., 322 F.3d 218, 222–23 (3d Cir.2003). Plaintiffs had little time to absorb the new material and no effective opportunity to depose witnesses nor to incorporate such a vast amount of material into their own motion for summary judgment. Plaintiffs even had to waste time and money to realize that the exhibits were new and to review those exhibits, which unfairly detracted from Plaintiffs' allotted time to respond to Health Net's summary judgment motion. Plaintiffs did not have the new material for depositions that occurred during discovery and thus could not question deponents about those documents. Finally, Plaintiffs were forced to file a request with the Court to strike the late exhibits in response to Defendants' strategic discovery delay. This is more than ample prejudice under Third Circuit precedent to weigh in favor of precluding the never-produced exhibits.
Defendants argue that Plaintiffs could cure the prejudice they suffered in the three *106 months before the then-scheduled September 19, 2005 trial date, or during the time spent waiting for the Third Circuit to rule on Defendants' appeal of class certification. This rationale has been strongly rejected, however, where defendants have resisted their discovery obligations in “a remarkable pattern of delay and obfuscation,” such as exists in this case to an unprecedented degree. Compare
Jankins v. TDC Mgm't Corp., 21 F.3d 436, 444 (D.C.Cir.1994) (finding preclusion sanction proper, even though prejudice to plaintiffs would be minor due to postponement of trial date, where defendants engaged in wilful misconduct by failing to provide court-ordered discovery sufficiently in advance of the trial date) with
Kotes v. Super Fresh Food Mkts., Inc., 157 F.R.D. 18, 20 (E.D.Pa.1994) (finding preclusion unwarranted where neither
party fully complied with the scheduling order and the Rule 26 disclosure requirements, their questionable conduct did not clearly evidence bad faith, and a “revised trial date permit[ted] the parties to cure any prejudice caused by their mutual
failure to properly complete discovery”) (emphasis added). Defendants' strategic delays have disrupted this Court's and the Magistrate Judge's attempts to manage this case to trial in an efficient manner. Defendants have adopted a persistent pattern of delay and obfuscation, which has been instrumental in ensuring that this case had not reached a trial on the merits despite having been on this Court's docket for over 5 years.
Finally, this is not a case of inadvertent or negligent failure to disclose the existence of additional discovery. Defendants had the opportunity, but instead they chose not to notify Plaintiffs or the Court that they were planning to rely on documents that had never before been produced. When Defendants wrote to the Court on March 31, 2005 to outline which categories of documents they had not yet produced to Plaintiffs, they failed to mention that they were gathering and planning to use additional unproduced documents consisting of reams of additional Evidences of Coverage and Statements of Benefits. Nor did the Defendants alert Plaintiffs or the Court to these additional documents at the Final Pretrial Conference in May 2005. Such knowing silence constitutes sufficient evidence that Defendants chose not to produce the belated discovery until a moment when its impact would be most acute. Furthermore, Defendants' repetitive pattern of strategic delays only further supports the conclusion that this incident was, like Health Net's other discovery violations, committed in bad faith. Plaintiffs' request to strike is granted.
The purpose of a privilege log is to identify for the opposing side those documents that exist in response to a document request but are not being produced because of a privilege assertion. The privilege log then allows the court and counsel to determine whether there should be a further inquiry into the bases for the assertion. This process cannot begin if the documents, which are the subjects of the log, are never identified in discovery. Local Civ. R. 34.1 and Fed.R.Civ.P. 26(b)(5) govern the production of privilege logs in discovery. The Advisory Committee Notes to the 1993 Amendments of Rule 26(b)(5) state:
A party must notify other parties if it is withholding materials otherwise subject to disclosure under the rule or pursuant to a discovery request because it is asserting a claim of privilege or work product protection. To withhold materials without such notice
is contrary to the rule, subjects the party to sanctions under Rule 37(b)(2), and may be viewed as a waiver of the privilege or protection. (emphasis added)
Courts have interpreted Rule 26 to require production of a privilege log within a sufficient amount of time after a document request is served in order to preserve the privilege of documents called for in the production. See
Burlington N. & Santa Fe Ry. Co. v. United States District Court, 408 F.3d 1142 (9th Cir.2005) (finding waiver of privilege where log was not filed until five months after the document request); see also
Get–A–Grip, II, Inc. v. Hornell Brewing Co., 2000 WL 1201385 (E.D.Pa. Aug. 8, 2000) (finding *107 waiver where privilege log was approximately two months late). Health Net's conduct abused both the adversary and the Court's effort to manage this litigation.
On January 5, 2006, Plaintiffs filed a Motion to strike Defendants' Privilege Logs 12 and 13 as untimely. Defendants served Log 12 on December 16, 2005, two years after the scheduled close of discovery. It includes communications from the files of six witnesses whom Magistrate Judge Shwartz had allowed Defendants to designate late as trial witnesses provided
that Plaintiffs had an opportunity to depose those individuals. See
Magistrate Judge Shwartz Opinion and Order of August 31, 2005. The Magistrate Judge had set rules requiring complete document discovery for each witness prior to the deposition. See
Magistrate Judge Shwartz's December 17, 2004 Order. Defendants conceded at oral argument that they (1) failed to provide full document discovery for such late-designated witnesses prior to their depositions, and (2) failed to so inform Plaintiffs counsel. See
11/22/05 Tr. 11:17–14:8 and 03/09/06 Tr. 33:8–15. Thus, this illustrates a continued pattern of concealed non-compliance with Court Orders and waste of Plaintiffs' resources. Because the precondition set by Court Order for the late designation of Defendants' witnesses was violated without notice to Plaintiffs or any effort to avoid wasting Plaintiffs' resources, the Court will not order the depositions to be retaken but will instead bar Defendants' use of any late-designated witnesses produced for depositions without full document production in advance as a Rule 37 sanction for the repeated concealed violation of Court orders.
Log 13, served on December 19, 2005, is comprised of documents related to Ms. O'Donnell that Defendants never produced in discovery. They only emerged upon Court Order at the Rule 37/Integrity Hearing. Plaintiffs argue that both logs are untimely because the documents were never produced in discovery. Defendants counter that the logs were timely because Defendants served the privilege logs within days of producing the corresponding documents during the Integrity Hearing on December 14th (Log 12) and December 9th (Log 13) 2005. On March 9, 2006, the Court heard oral argument on the Motion. Plaintiffs have since also moved to strike Privilege Logs numbered 14 through 53 on the same grounds.
Defendants' arguments conflate the proper timing question. At the March 9, 2006 hearing, Defendants conceded that there are two timing issues: first, the timeliness of the production of documents, and second, the timeliness of the log of privilege claims arising from those documents. To “de-conflate” Defendants' argument, they claim that although the documents were years late, the logging was on time because the logs were served on Plaintiffs within days of Defendants' identification of the documents. This argument borders on facetious. The issue is not the number of days between the document and log; it is the number of years
that passed without even identifying the document in the first place. The Court finds that the documents were never produced during discovery, and the privilege claim is waived. Thus the logs created for the first time during the Rule 37/Integrity Hearing are stricken, and the documents should be turned over forthwith.
To “produce” a document because the Court has found it necessary to convene a Rule 37 Hearing and then itself demand production after Defendants ignored prior Court orders to produce them is not
“production” in discovery. Such documents were never produced nor identified nor logged during discovery. They would not have seen the light of day had the Court not taken the extraordinary step of convening an Integrity Hearing to look into litigation abuses by Health Net. The vast majority of the documents identified in Logs 12 and 13 were not
identified in discovery. Defendants' attorneys could not even answer the Court's question as to whether the documents referenced in Logs 12 and 13 should have been produced two years before the Integrity Hearing. The witnesses whose documents are listed in Log 12 were already deposed by Plaintiffs before the bulk of such documents were identified in the privilege log. These depositions should have been conducted pursuant to the Magistrate Judge's Orders that all documents of witnesses had to be produced and/or logged prior
to depositions. As noted above, this *108 did not happen. No one from Defendants' legal team ever told Magistrate Judge Shwartz or Plaintiffs that the depositions were proceeding without full document disclosure. Nor were many of Health Net's witnesses even asked to search for relevant documents leading up to their depositions, despite Magistrate Judge Shwartz's December 17, 2004 Order to do so. This is abusive and contemptuous of Magistrate Judge Shwartz's Orders and of the adversary. Log 13 lists hundreds of e-mails to and from Eileen O'Donnell, dated in 2002 and 2003, which should have been identified during the discovery period but were not. Health Net never even searched for them during the discovery period.
The privilege identified in logs 14, 16–23, 24–36, and 37–53 is similarly waived as extraordinarily untimely. Health Net never searched for these documents during discovery. Log 14 contains entries of regulatory documents dating back to 2001 and to December 2004/January 2005, which are related to the California Department of Managed Health Care investigation of Health Net. Magistrate Judge Shwartz's Orders of December 17, 2004 and February 15, 2005 had long ago ordered that they be produced. Indeed, Magistrate Judge Shwartz had already granted sanctions against Health Net for its failure to timely produce documents related to the California regulators' investigations of the Health Net entities' handling of ONET reimbursements. In light of this history, the non-production/logging of these documents is abusive.
Health Net next argues that their boilerplate one-word “burdensome” objections to the Plaintiffs' discovery requests relieved them of the duty to identify/log documents. This is yet another example of Health Net granting itself a ruling 180 degrees opposite of the Magistrate Judge's order to produce, so ordered after hearing any and all burdensomeness objections pressed by Defendants in argument before the Magistrate Judge. Defendants argue that if they put a boilerplate “burdensome” objection on a form, and the documents were thereafter ordered to be produced by Magistrate Judge Shwartz, her order was not a ruling rejecting their objection unless she voiced the words “I reject your burdensomeness objection.” Often, Defendants did not even argue that production was burdensome. Even more audacious, Defendants did not inform the adversary or Magistrate Judge Shwartz of their unique method of silently overruling the Magistrate Judge.
Throughout the long discovery period in this case the parties brought disputes that they could not resolve on their own to Magistrate Judge Shwartz for resolution. Magistrate Judge Shwartz, after hearing from the parties, would rule on discovery requests, taking into account the objections raised by Defendants. Magistrate Judge Shwartz then entered orders reflecting the discovery remaining for Defendants to produce. If Defendants planned to withhold further documents after such rulings based upon the assertion of the attorney-client privilege, they were obligated to log their assertions of privilege right then and there. To not do so is a violation of a Court Order to produce, a lack of candor to the Magistrate Judge,
and a waiver of the privilege.
*109 Defendants try to shift their own burden away by arguing that Plaintiffs' counsel was obligated, pursuant to Local Rule 26.1, to affirmatively ask Health Net's counsel about the company's backed-up email systems and how emails were maintained or stored, and, presumably, that Defendants could mislead by silence if the question was not asked. Section (d) was added to Local Rule 26.1, effective October 6, 2003, to address the emerging issue of discovery of digital information, including computer-based data. Rule 26.1(d) states that:
“(1) Prior to a Fed.R.Civ.P. 26(f) conference [initial discovery conference], counsel shall review with the client the client's information management systems including computer-based and other digital systems, in order to understand how information is stored and how it can be retrieved .... counsel shall further review with the client the client's information files, including currently maintained computer files as well as historical, archival back-up, and legacy computer files, whether in current or historic media or formats ...
(3) Duty to Meet and Confer. During the Fed.R.Civ.P. 26(f) conference, the parties shall confer and attempt to agree on computer based and other digital discovery matters, including the following:
(a) Preservation and production of digital information; ... whether restoration of deleted digital information may be necessary; whether back up or historic legacy data is within the scope of discovery ...”
Defendants' attempt to shift blame fails. First, the Rule applies to counsel's obligations before and at the initial discovery conference, which occurred in both the Wachtel
Rule 26.1(d) was adopted. Second, even assuming that the Rule had applied, it requires the involvement of both
counsel. Counsel for Defendants are first to have reviewed its client's information management systems, and that did not occur here. Without Health Net's disclosure of its system to defense counsel, there is no way that the parties can have a frank discussion under their duty to meet and confer. As Defendants' attorneys have testified, for most of this litigation they did not know about Health Net's policy of storing e-mails on back-up tapes after 90 days nor about the fact that employees could delete emails within 30 days, thereby causing the emails to be lost permanently. See
Certification of Barry M. Kazan, Esq. dated March 15, 2006 (stating that the earliest any attorney at Epstein Becker & Green was aware of these facts was early March 2005); 03/09/06 Tr. 22:13–18 (attorneys at Morgan Lewis & Bockius were not aware in November 2005 of these facts); 03/01/06 Tr. 4:19–5:21 (counsel at McCarter & English who was handling discovery was not aware of these facts until the spring of 2006.) Given this lack of knowledge by Defendants' attorneys, it is disingenuous to suggest that Plaintiffs are the ones at fault for not asking Health Net's counsel about the company's backed up email systems.
This Court grants the motion to strike the privilege assertions on Defendants' Privilege Logs 12–14 (except entries # 1 # 21 on Log 14) and on Logs 16–23, Logs 24–36, and Logs 37–53 which were created before March 10, 2005—the deadline for fact discovery, after numerous extensions—and requires production of all documents identified therein to Plaintiffs by December 18, 2006.
The Court will not strike the privilege assertions in Log 15 on this ground. This Log was created pursuant to Magistrate Judge Shwartz's Order of December 12, 2005, which sought information as to Defendants' compliance with the discovery process. It contains written instructions from Health Net's in-house and outside counsel to Health Net employees about discovery production. Based upon the record developed in this case, including the evidence gathered at the hearings and the findings embodied in various Orders concerning Defendants' failure to adequately preserve documents and failure to produce responsive documents despite knowing that such discovery was sought, the Court orders the parties to submit briefs, as *110 set forth in the accompanying Order, that explain whether In Re Grand Jury, 445 F.3d 266 (3d Cir.2006), voids the assertion of the privilege over the documents identified in Log 15. The Court will have Magistrate Judge Shwartz rule on whether or not In Re Grand Jury voids the assertion of the privilege and requires the production of the documents identified on Log 15.
In order to expedite Defendants' complete production of backed-up e-mails, as ordered by this Court's May 5, 2006 Order, and to prevent the need for further motions by Plaintiffs to strike Defendants privilege logs, Defendants shall forthwith produce any e-mails created before March 10, 2005 that are uncovered through their review of backup tapes. Defendants shall not review or withhold such e-mails for privilege, as this Court has determined that the privilege over such e-mails has been waived. E-mails produced from the search that are dated after March 10, 2005 may still be reviewed for privilege and logged accordingly.
This matter having come before the Court upon Plaintiffs' Motion for a Hearing Under the Inherent Power of the Court to Preserve the Integrity of the Judicial Process and Under Federal Rule of Civil Procedure 37, as well as the additional motions and other applications stated in the accompanying Opinion; and for the reasons set forth in this Court's Opinion of December 6, 2006;
IT IS on this 6th day of December, 2006,
ORDERED that Plaintiffs' Application for Sanctions Under the Inherent Power of the Court to Preserve the Integrity of the Judicial Process and Under Federal Rule of Civil Procedure 37 and for various relief [Wachtel Docket No. 269; McCoy Docket No. 245] is GRANTED IN PART; and it is
ORDERED that Plaintiffs' application to strike Health Net's 20,000 pages submitted in support of Health Net's motion for summary judgment and as designated trial exhibits, which were not produced to Plaintiffs in discovery, is GRANTED; and it is further
ORDERED that Plaintiffs' Motion in Further Support of Application for a Discovery Monitor and Default [Wachtel Docket No. 356; McCoy Docket No. 348] is GRANTED IN PART; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' January 2, 2006 Filing [Wachtel Docket No. 379; McCoy Docket No. 374] is DENIED; and it is further
ORDERED that Plaintiffs' Motion to Strike Defendants' Privilege Logs Numbers 12 and 13 [Wachtel Docket No. 369; McCoy Docket No. 363] is GRANTED; and it is further
ORDERED that Plaintiffs' Motion to Strike Defendants' Privilege Logs Numbers 14–22 [Wachtel Docket No. 480; McCoy Docket No. 473] is GRANTED IN PART; and it is further
ORDERED that Plaintiffs' Motion to Strike Defendants' Privilege Log Number 23 [Wachtel Docket No. 485; McCoy Docket No. 478] is GRANTED; and it is further
ORDERED that Plaintiffs' Motion to Strike Defendants' Privilege Logs Numbers 24–36, to Review Certain Logged Documents Under Crime–Fraud, for Sanctions for Failing to Submit Documents for In Camera
Review and for Fees and Costs for Health Net's Misconduct [Wachtel Docket No. 542; McCoy Docket No. 533] is GRANTED IN PART; and it is further
ORDERED that Plaintiffs' Motion to Strike Defendants' Privilege Logs Numbers 37–53 and for Fees and Costs due to Health Net's Misconduct [Wachtel Docket No. 591; McCoy Docket No. 587] is GRANTED IN PART; and it is further
ORDERED that Defendants shall produce to Plaintiffs by December 18, 2006 all documents identified in Privilege Logs 12–14 (except entries # 1—# 21 on Log 14), Logs 16–23, Logs 24–36, and Logs 37–53 which were *114 dated prior to March 10, 2005; and it is further
ORDERED that, no later than December 15, 2006, Defendants shall submit a brief, no longer than ten pages, that explains whether or not In re Grand Jury, 445 F.3d 266 (3d Cir.2006), voids the assertion of the privilege over the documents identified in Log 15; that no later than December 22, 2006, Plaintiffs shall submit a response brief, no longer than ten pages; that no replies will be permitted unless requested by the Court; and Magistrate Judge Shwartz shall rule on whether or not In re Grand Jury voids the assertion of the privilege and requires the production of the documents identified in Log 15; and it is further
ORDERED that the documents in Log 14 relating to a New York Department of Insurance investigation, numbered 1–21, are referred to the Special Master for evaluation of the privilege claim, and that Health Net shall submit these documents to the Special Master by December 18, 2006; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' Reply Brief or, in the Alternative, Motion for Leave to File a Surreply Brief [Wachtel Docket No. 509; McCoy Docket No. 500] is GRANTED IN PART; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' Letter–Motion Dated August 11, 2006 [Wachtel Docket No. 529; McCoy Docket No. 520] is DENIED; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' Response to Health Net's June 23, 2006 Responses Regarding its E-mail Production [Wachtel Docket No. 513; McCoy Docket No. 503] is DENIED; and it is further
ORDERED that Plaintiffs' Motion to Supplement I/37 Findings, Plaintiffs' Motion for Summary Judgment that HNI is a Fiduciary and for Sanctions [Wachtel Docket No. 547; McCoy Docket No. 538] is GRANTED IN PART; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' Reply Brief or, in the Alternative, Grant Defendants Leave to File a Surreply [Wachtel Docket No. 580; McCoy Docket No. 572] is DENIED; and it is further
ORDERED that Defendants' Motion to Strike Plaintiffs' Reply Brief or, in the Alternative, Grant Defendants Leave to File a Surreply [Wachtel Docket No. 583; McCoy Docket No. 575] is DENIED; and it is further
ORDERED that, no later than December 15, 2006, Defendants shall submit a brief, no longer than ten pages, addressing whether their proposed findings of fact embodied in paragraphs 75, 76, and 106 constitute a partial waiver of their attorney/client privilege and shall produce the documents Plaintiffs seek regarding Defendants' proposed findings of fact for in camera
inspection; that no later than December 22, 2006, Plaintiffs shall submit a response brief, no longer than ten pages; that no replies will be permitted unless requested by the Court; and Magistrate Judge Shwartz shall rule on whether or not there has been a partial waiver; and it is further
ORDERED that this Court modifies its May 5, 2006 Opinion affirming Magistrate Judge Shwartz's August 31, 2005 Opinion and shall bar Defendants' late-designated witnesses at trial, who were produced for depositions without full document production in advance, for failure to comply with Magistrate Judge Shwartz's Order as set forth in the accompanying Opinion; and it is further
ORDERED that Health Net shall produce forthwith to Plaintiffs any e-mails or attachments dated prior to March 10, 2005 that are found through the review of backup tapes, without withholding such e-mails or attachments based on privilege, for the reasons set forth in the accompanying Opinion; and it is further
ORDERED that there shall be a monetary sanction assessed against Health Net in an amount to be specified by the Court after it affords Health Net the opportunity to state its financial condition; and Defendants shall file with this Court by December 18, 2006 public filings, including but not limited to statements submitted to the Securities and Exchange Commission, as well as a brief not longer than ten pages regarding the financial *115 condition of Health Net, Inc. to be considered by this Court in assessing a monetary sanction; and it is further
ORDERED that, no later than December 12, 2006, Plaintiffs shall submit an application not to exceed three pages setting forth the basis for their demand for documents regarding former Governor Florio's activities in his capacity as a consultant who assessed Health Net's out-of-network claims payment policies and practices and its dealings with regulators, including relevance; that no later than December 19, 2006, Defendants shall submit a response, not to exceed three pages; that no replies will be permitted unless requested by the Court; and Magistrate Judge Shwartz shall rule on whether the documents shall be produced; and it is further
ORDERED that Health Net shall forthwith pay the Plaintiffs' reasonable attorneys' fees and expenses incurred in connection with: (1) the Rule 37/Integrity hearing and all briefing in connection therein and (2) each of Plaintiffs' motions brought to invoke discovery compliance after an Order of the Magistrate Judge or the Court had previously so ordered, for the reasons set forth in the accompanying Opinion; that Plaintiffs shall submit to the Court by December 18, 2006 an affidavit to support attorney's fees and expenses; and that Defendants shall submit any response by December 28, 2006; and it is further
ORDERED that Health Net shall pay attorney's fees and expenses for any renewed depositions of witnesses whose documents were not completely searched or produced prior to their depositions; that Defendants shall produce the witnesses on any date designated by Plaintiffs; and that Plaintiffs must complete the depositions by February 28, 2007; and it is further
ORDERED that this Court adopts Magistrate Judge Shwartz's Report and Recommendation dated December 28, 2005 that the Rule 37 proceedings shall also consider sanctions for the conduct of Health Net during those proceedings, in which Health Net and Herve Gouraige, Esq. stopped restoring and producing e-mails (despite a Court order to do so) on legally frivolous grounds; and it is further
ORDERED that this Court will reserve on Magistrate Judge Shwartz's Report and Recommendation that sanctions be personally imposed upon Herve Gouraige [Wachtel Docket No. 572; McCoy Docket No. 564] until the Court considers the appeal of the Report and Recommendation for the aforementioned conduct; and it is further
ORDERED that this Court reserves on a per day sanction for Health Net's failure to meet the Court's September 30, 2006 final deadline for the restoration, review, and production of e-mails and attachments; and it is further
ORDERED that this Court reserves on default judgment as a sanction until all the class action issues have been resolved; and it is further
ORDERED that certain facts, as specified in the accompanying Opinion, will be deemed admitted against Health Net; and it is further
ORDERED that this Court will reserve on what sanctions in addition to those detailed in the accompanying Opinion may be appropriate because of the evidence of Defendants' spoliation; and it is further
ORDERED that this Court will appoint a Special Master to monitor the completion of all discovery compliance; and Defendants shall pay the entirety of the Special Master's fees; and it is further
ORDERED that any party who appeals this decision to the U.S. Court of Appeals for the Third Circuit shall request consolidation of this matter with any other appeal of the Court's pretrial Orders so that this case can be expeditiously readied for trial.