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Federal Court Orders KPMG To Preserve 2,500 Hard Drives

Forbes.com - Ben Kerschberg

A federal district court recently held in an important electronic discovery opinion that KPMG must preserve more than 2,500 hard drives at an estimated cost of $1.5 million.

In Pippins v. KPMG LLP (S.D.N.Y. Feb. 9, 2012), Pippins and other putative class plaintiffs sued KPMG under the Fair Labor Standards Act (“FLSA”), which guarantees time-and-a-half pay for overtime above 40 hours for certain jobs. The plaintiffs, who worked as Audit Associates, alleged that they were deliberately denied overtime wages. The FLSA’s overtime rule does not apply to those employed in an executive, administrative, or professional capacity that involves discretion and independent judgment “with respect to matters of significance” and requires either (i) an advanced knowledge of science, or (ii) specialized intellectual instruction.

The plaintiffs’ arguments presented Magistrate Judge James Cott with a number of specific questions class-action related that are inapposite here except with respect to their bearing on the gravamen of the case: the scope of preservation of the employees’ hard drives while the matter of certification itself was being resolved.

Judge Cott ordered KPMG to preserve all existing hard drives until either further judicial notice or a settlement. KPMG appealed, arguing that the holding was unreasonably broad.

U.S. District Court Judge Colleen McMahon took over from there and minced no words. The plaintiffs had asked to take samples from only five (5) randomly selected hard drives in order to determine whether the issue of scope was even worth contention based on what keywords they might have determined to be germane. Commenting on KPMG’s Motion for a Protective Order before the magistrate, Judge McMahon wrote: “KPMG, hiding behind the stay of discovery, insisted it could not produce even one hard drive for inspection by the plaintiffs.”

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The court found that as long as KPMG was allowed to use the discovery stay during the determination of class certification, it would be impossible to determine whether the relevance of information stored on even a single hard drive. The court reiterated the magistrate’s finding that the individual employees were “key players . . . likely to have relevant information” about the nature of their jobs, and thus whether they were due overtime under the FLSA. Accordingly, KPMG had a duty to preserve every Audit Associate’s hard drive when the suit was first filed “because at that point it became foreseeable that each and every Audit Associate could be a potential plaintiff.” As a result, it was “premature” to permit any hard drives to be destroyed. In this respect, Judge McMahon again agreed with her magistrate. She wrote that Magistrate Cott’s Order was “not clearly erroneous or contrary to the law; quite the contrary, it represented sound litigation management. She added that she had “no intention of putting Judge Cott through this exercise again.”

The district court then held that KPMG had to preserve all 2,500 hard drives in question – “all of them, without exception,” until such time as either (i) the parties settled the case, or (ii) KPMG formally abandoned its position. With respect to relevance, the court turned KPMG’s own argument against it. In view of KPMG’s position that not a single one of its hard drives should be produced, the court reasoned that “the relevance of the work Audit Associates performed is indisputable and that the benefits” of producing the hard drives outweighed the costs in this matter notwithstanding the $1.5 million necessary to preserve them.