US District Judge Rebukes KPMG, Calls Conduct “Unreasonable’ in Huge Overtime Suit by Ex-Employees

Association of Certified E-Discovery Specialists - ACEDS Staff
February 15, 2012

Affirming massive preservation order, Judge Colleen McMahon comes down on KPMG for refusing to produce hard drives in large case over denied wages

KPMG, the giant global Big Four firm, is facing a class action in the federal district court in Manhattan by former employees that could have long-lasting and extremely costly consequences for every company and firm that is defending a multi-plaintiff case.

The class action lawsuit for denied overtime wages includes allegations that go back to 2008, and could cover thousands of former KPMG employees.

The novelty of the case, and what is causing thousands of big law and big corporate eyes to focus on it, is that the firm is not only facing the scorn of a US district judge but also confronting a requirement by the judge that it is to preserve the hard drive of every former employee who may possibly join the suit.

The ruling by US district Judge Colleen McMahon, from her Manhattan courtroom, affirms an order by a federal magistrate judge along the same lines.

Plaintiff groups criticize KPMG’s conduct and say the case underscores the latitude courts have in assuring appropriate discovery is conducted in good faith. The plaintiffs in the case say they don’t know what is on the hard drives, but fault KPMG for refusing to produce them or describe their contents. They say any destruction of the hard drives would compromise evidence because parties have not agreed on a preservation and discovery plan.

US Chamber of Commerce “picked wrong case to make so much noise,’ says plaintiffs lawyer

The Chamber of Commerce picked the wrong case to make so much noise, ” says attorney Justin M. Swartz, of Outten & Golden, in New York, who represents Kyle Pippins and three plaintiffs that have been named to date. KPMG failed to cooperate. It got what it deserved. ”

The Chamber should focus on a case where the defendant has cleaner hands, ” he adds.

Controversy arose from initial failure to agree on hard drive discovery

The present dispute arose from the inability of the parties to agree on how to sample the content of the hard drives. KPMG would not produce any hard drives for inspection. It alleged that a discovery stay imposed by McMahon in July 2011 prevented it from doing so.

Case rose from former KPMG “audit associates’ asserting overtime abuses

The lawsuit, which was filed in January 2011, alleges overtime wage abuse under the Fair Labor Standards Act and New York law. KMPG says that its audit associates, who are the principal members of the class, are exempt from overtime pay.

Last August, KPMG sought a protective order limiting its preservation obligations while the court was considering whether to certify a class. It asked magistrate Judge James Cott to limit to 100 the hard drives it must preserve. It said it had randomly sampled the hard drives of some former employees.

Cott denied the motion and ordered preservation of the hard drives of all potential class members, unless the parties could agree on a sampling methodology. He also denied KPMG’s request to shift preservation costs to the plaintiff, saying that the firm had not made a convincing case that the hard drives were not relevant.

District judge says KPMG stonewalled cooperation, acted “unreasonably’

The only things that were unreasonable were: (1) KPMG’s refusal to turn over so much as a single hard drive so its contents could be examined; and (2) its refusal to do what was necessary … to engage in good faith negotiations over the scope of preservation with Plaintiffs’ counsel, in purported reliance on an order of this court that it interpreted unreasonably, ” she added.

Neither side [asked] me whether … the stay prevented KPMG from producing any hard drives …. Had I been contacted, I would have immediately ordered KPMG to produce a small number of hard drives so that Plaintiffs’ counsel could peruse them, and that would have been the end of the matter. ”

Now that McMahon has certified the class, KPMG may renew its efforts before McMahon to limit its preservation duties.

Fallout from McMahon order may be wide

The McMahon order may alter the dynamic between requesting and producing parties in large cases. By ordering that all potentially relevant data must be preserved if a discovery agreement is not reached, requesting parties that do not have to bear preservation costs may negotiate discovery differently.

KPMG says the most accurate information on when its employees worked and what their compensation was may be found on its time and payroll records, which it preserved. It also cites the discovery stay in refusing to present the hard drives for inspection.

District judge rebukes KPMG

That drew this stern rebuke from McMahon: KPMG has inappropriately used the discovery stay as a shield, relying on it in refusing to produce even a few hard drives so Plaintiffs could examine them. ”

Last month, McMahon tried unsuccessfully to resolve the dispute when she certified the class. She ordered expedited discovery on a class-wide issue rather than the individual claims. Discovery negotiations again broke down.

Defendants don’t want to produce things that are helpful to the plaintiffs’ case, ” plaintiffs attorney Swartz told ACEDS. Hopefully, KPMG will take Judge McMahon’s order to heart and negotiate in good faith, but I’ve been wrong before. ”

KPMG and Sidley Austin, the large law firm that represents it in this case, declined to comment.

The McMahon order may also contribute to the notion of basing preservation duties on proportionality, the concept of linking the scope of efforts to the value or significance of the case.

… [P]roportionality is necessarily a factor in determining a party’s preservation obligations, ” she writes.McMahon, however, says KPMG short-circuited the application of proportionality standards by its refusal to produce the hard drives.

KPMG’s conduct precluded “balancing of costs, benefits’ of preservation, judge says

I cannot conclude that the cost of preserving hard drives outweighs its benefits, as KPMG urges … because the record … is devoid of information necessary to conduct such an analysis …. I cannot possibly balance the costs and benefits of preservation when I’m missing one side of the scale (the benefits) …. In short, KPMG is hoisted on its own petard. ”   Those who come to KPMG’s defense say the decision could disadvantage large corporate defendants in multi-plaintiff cases.

The big picture is that we are a world awash in electronic information. The sheer volume means that there’s a large cost associated with it, ” defense lawyer Misir says. At some point you have to say “you can’t preserve everything.’ “Swartz and his colleagues in the plaintiff bar do not agree.