The Delaware Chancery Court's Zero-Tolerance Policy Toward Discovery Abuse

The Delaware Chancery Court’s Vice Chancellor J. Travis Laster recently made clear the court’s zero-tolerance policy toward discovery abuse, which, he admonished, “has no place in [Delaware] courts[.]”  

Cracking down on parties and attorneys who tried to “shirk” their discovery obligations in an attempt to cheat their adversaries out of a just, speedy, and inexpensive proceeding, the court in In re ExamWorks Group, Inc. v. Stockholder Appraisal Litigation¹ sanctioned petitioners for failure to meet discovery deadlines and failure to communicate delays in document production to opposing counsel. The court further concluded that waiver of privilege is an appropriate consequence for parties who fail to produce privilege logs until months after a discovery deadline.  

ExamWorks² involved an appraisal proceeding brought by a group of investment funds following the announcement of a merger between ExamWorks and affiliates of Leonard Green & Partners, L.P. to request that the court determine the fair value of their proportionate interest in ExamWorks Group, Inc. (“ExamWorks” or the “Company”). The Company filed two motions seeking discovery sanctions against the petitioners.

Delayed Production of Documents and Privilege Logs

First, ExamWorks sought sanctions against five sophisticated investment fund petitioners that had failed to produce any documents during the allotted fact discovery period and never notified opposing counsel of the delays. Six weeks after the discovery cutoff, the funds dumped 68,052 pages of documents onto the Company. As the court explained, the funds had ample time and resources to meet the discovery deadline but simply failed to do so. The court further explained that if petitioners had needed more time, they should have conferred with opposing counsel or sought an amended scheduling order. Instead, “[they] were happy to let [ExamWorks] bear the expense of litigation while giving themselves a pass,”³ and even when the funds did produce documents, the production was “sloppy and haphazard.”⁴ Consequently, ExamWorks suffered actual prejudice, because it was unable to use these documents to support its case.  As a result, the court required the funds to reproduce their witnesses for deposition, bear all expenses associated with the delayed production, and comply with additional discovery obligations.

Second, ExamWorks sought sanctions against all of the petitioner funds for their inadvertent failure to produce third-party documents to the Company until 10 weeks after the discovery cutoff. The court allowed ExamWorks to choose the petitioners’ sanction: Either no party could use the third-party documents or every party could.  Because the court concluded that this conduct constituted only “excusable neglect,”⁵ however, it did not require the funds to bear all expenses associated with the delayed production.

Moreover, both of the Company’s motions sought sanctions against all petitioning funds for belated production of privilege logs. Noting the inadequacy and sloppiness of the few privilege logs actually produced by certain funds, the court determined that waiver of the privilege was a suitable consequence. The court ordered the production of documents previously included on the privilege logs and allowed ExamWorks leave to conduct supplemental depositions of the funds’ representatives based on such documents.

Court of Chancery Rule 37(b)(2) Sanctions

As Vice Chancellor Laster explained, the Delaware Chancery Court has the power to issue sanctions pursuant to Court of Chancery Rule 37(b)(2)⁶ and under its inherent equitable powers. Sanctions could potentially include, but are not limited to, any of the following: (1) an order designating certain facts as established; (2) an order refusing to allow the abuser to support or oppose designated claims or defenses or prohibiting that party from introducing designated matters into evidence; (3) an order striking particular pleadings or portions thereof; (4) an order staying further proceedings until the order is obeyed; or (5) an order entering default judgment against the abuser—the ultimate sanction for discovery violations that should be used sparingly.  Moreover, Rule 37(b)(2) mandates an award of reasonable expenses, including attorneys’ fees, for discovery abuse, absent a showing by the wrongdoer that his actions were substantially justified or that other circumstances make the award unjust.

Discovery Obligations

The court in ExamWorks explained thatdiscovery serves multiple purposes: It assists in fact revelation, advances issue formulation, and reduces the element of surprise at trial. These purposes, in turn, serve the underlying policy that “a trial decision should result from a disinterested search for truth from all the available evidence rather than tactical maneuvers based on the calculated manipulation of evidence and its production.”⁷ Moreover, candor and fair dealing are the hallmarks of litigation, and the “rules of discovery demand no less.”⁸ Those who litigate before the Delaware Chancery Court must understand that scheduling orders are not simply guidelines; they have the “same full force and effect”⁹ as any other court order, and those who disregard provisions of a scheduling order are engaging in discovery abuse.

The court went on to note that discovery abuse has consequences at two levels.  The first is the obvious—the actual prejudice to the other party in the specific case at hand.  However,

[a] second level of prejudice involves the degradation of the litigation process.  For the litigation system to function, parties must follow the rules.  If participants suspect that others are not following the rules, then the process deteriorates.  People who follow the rules feel like chumps when others seem to be cutting corners or breaking rules and getting ahead.  People who otherwise might not think of pushing limits become more aggressive if they think everyone else is doing it.  It is this broader, systemic interest that the Delaware Supreme Court seems to have had in mind when stressing that courts must address discovery abuse not only to protect litigants, but also to protect the public and the bar.

Consequently, the court will actively sanction those who engage in discovery abuse, as well as those attorneys who “shirk their obligations to the court,”¹⁰ thus making matters worse.

ExamWorks is a clear example of what not to do during discovery. While the consequences of breaking the rules are quite severe, the court is willing to provide more leniency to those who are forthcoming and transparent about potentially missing a discovery deadline. The Delaware Chancery Court reasoned that “humans are not psychic”¹¹ and communication fosters efficient relationships. When parties are transparent, they can cooperate to address problems without judicial involvement. As officers of the court, attorneys can find solutions to keep the case and discovery on track. Thus, the best practice is to openly communicate with opposing counsel to avoid all possibilities of engaging in discovery abuse and thus to avoid damaging sanctions.