Case 1:06-cv-00305-MBH Document 73-2 Filed 11/05/2007 Page 1 of 9
IN THE UNITED STATES COURT OF FEDERAL CLAIMS
OF NEW YORK, INC &
CONSOLIDATED EDISON COMPANY )
No. 06-305 T
Judge Marian Blank Horn
PLAINTIFFS’ MEMORANDUM REGARDING PROBABLE
EVIDENTIARY DISPUTES THAT WILL ARISE WITH RESPECT
TO THE GOVERNMENT’S SPOLIATION OF EVIDENCE CLAIM
Plaintiffs, Consolidated Edison Company of New York, Inc. & Subsidiaries (“Con Ed”),
respectfully submit this memorandum regarding objections that are expected to arise during the
examination of Mr. Andrew Scher, which is scheduled to be part of the government’s case-in-
chief. Rather than make these objections for the first time during the relevant testimony, we are
submitting this memorandum to provide the Court sufficient time to fully consider the legal rules
related to this testimony, as well as the “law of the case” effect of one of this Court’s earlier
rulings in this lawsuit.
Questions Regarding Allegedly Improper Document Preservation
Prior To 2005 Are Irrelevant Because Con Ed Was Not Required
To Take Affirmative Steps To Preserve Potentially Relevant
Evidence Until October Of That Year
With respect to its spoliation claim, the government does not appear to contend
that any Con Ed employee or official affirmatively shredded (or otherwise destroyed) physical
documents, or that they specifically deleted email messages that were believed to be relevant to
potential litigation regarding the EZH transaction. Nor is there evidence that any such
affirmative conduct occurred. Instead, the government complains about alleged sins of omission.
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Specifically, the government assumes (as reflected in its opening statement, Oct. 17, 2007 Tr.
100-01) that in either 1997, 2000, or 2001, Con Ed and CED must have violated a purported duty
to preserve material evidence by failing to implement a hold order to preserve all documents and
email related to the 1997 EZH transaction as evidence for litigation—and by replacing CED’s
then outsourced email system in late 2000 without taking additional steps to retain back-up tapes
(or otherwise preserve the data) from the earlier email system.
The government’s spoliation theory is fundamentally flawed because Con Ed did not
have a duty to preserve evidence until late 2005, when the IRS audit and appeals process was
complete, the IRS issued a Notice of Proposed Adjustment, and a lawsuit regarding the tax
treatment for the EZH transaction became likely—a “real possibility.” Energy Capital Corp. v.
United States, 45 Fed. Cl. 481, 485 (2000). Indeed, the Court’s previous ruling that plaintiffs did
not reasonably anticipate litigation in 1997—which resulted in Con Ed’s inability to sustain the
work product protection with respect to several documents—forecloses the government’s
potential argument that Con Ed (or CED) anticipated litigation such that it had a duty to preserve
Whether a party anticipated litigation at a given point in time requires an
objective reasonableness inquiry. See AAB Joint Venture v. United States, 75 Fed. Cl. 432, 445
(2007) (“party asserting work product privilege must set forth objective facts to support its
claim”). During the June 6, 2007 telephonic discovery hearing in this case, the Court held that
Con Ed could not maintain its assertion of work product protection with respect to the Sherman
& Sterling memoranda, and Mr. Scher’s October 1997 memorandum, all of which were created
in late 1997. Tr. 29-30, 32-34. Con Ed’s work product assertion was supported by Mr. Scher’s
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May 10, 2007 declaration, in which he explained his subjective understanding of “anticipation of
Con Ed NY’s federal tax returns for each of the 20 tax years
preceding the year of the EZH transaction had been audited by the
IRS[, and thus Con Ed] had ample reason to believe that any
contemplated lease-leaseback transaction it entered into was likely
to be challenged on audit by the IRS and might result in litigation.
Pls. May 11, 2007 Notice of Compliance (Dkt. No. 31), Ex. A ¶ 5. Although the Court
addressed the “state of mind” of Con Ed’s executives,1 the Court ultimately determined that Mr.
Scher’s subjective understanding—i.e., that the Company would likely be subjected to an “audit
by the IRS that might result in litigation” (emphasis added)—did not satisfy the objective
requirement of reasonable anticipation of litigation. June 6 Tr. at 29-30, 32-34. In short, Mr.
Scher’s belief that litigation might be possible following the conclusion of the Service’s lengthy
audit and appeals process was not enough: “an IRS audit contemplation does not trigger
necessarily a contemplation of litigation.” Id. at 29 (emphasis added). The Court further
explained that the limited precedent in this area “basically says an anticipated audit isn’t enough
to get you the work product privilege even if you expect that to happen.” Id. at 29-30.
Neither the initiation of the audit nor the conduct of the IRS audit materially changed
Con Ed’s position with respect to potential litigation. Many large companies, including Con Ed,
are audited every year by the IRS. See Scher Decl. ¶ 5. Those audits invariably involve
numerous informal procedures such as information document requests (IDRs), analysis by IRS
officials, meetings related to potential compromise of audit-related disputes, and appeals—all of
which are part of the standard operating procedures of the IRS that are used with large
1 June 6, 2007 Tr. at 33 (responding to a clarification request regarding “the relevance of
the documents  as to showing state of mind,” the Court explained: “I think it shows the facts
that were important at the time and the facts as they were understood at the time”).
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companies. Although litigation after an audit is always a possibility, the facts that Con Ed’s tax
return for a given year (and a specific transaction in that year) was being audited, and that the
Company was subjected to such administrative procedures during the audit, would not indicate
to a reasonable, objective observer that post-audit litigation was any more likely than before the
audit began. As a general matter, most companies’ disagreements with the IRS are resolved
during the audit and appeals process, and that is true with respect to virtually all of Con Ed’s
disputes over the years. Accordingly, as the Court has already ruled that Con Ed did not
reasonably anticipate litigation in 1997 prior to the initiation of the audit—and that Mr. Scher’s
subjective understanding that litigation “might result” after an IRS challenge was insufficient
under the objective “anticipation of litigation” standard—the same rationale would apply during
the audit and informal IRS appeals, until the conclusion of those processes in 2005.
With respect to the 1997 tax year and the EZH transaction, Con Ed was either being
audited or was pursuing an appeal within the Service’s process until late 2005. At that time, the
Company learned that, although it had always resolved disputes with the IRS in the audit/appeals
process before, it would not be able to resolve the disagreement concerning the EZH transaction
in a satisfactory manner with the Service. Thus, in late 2005, the potential of paying the taxes
and filing a lawsuit against the government was no longer a “remote possibility” but was actively
considered by Con Ed officials. In Energy Capital, this Court explained that the “anticipation of
litigation” standard “requires a more immediate showing than the remote possibility of
litigation”—litigation must be likely. 45 Fed. Cl. at 485 (quoting Occidental Chem. Corp. v.
OHM Remediation Servs. Corp., 175 F.R.D. 431, 434 (W.D.N.Y.1997)). This Court has further
recognized that some specific “[l]itigation must at least be a real possibility at the time” to satisfy
the anticipation of litigation standard. Id. Thus, applying the reasoning announced in the
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Court’s June 6 work-product decision, it was only in late 2005, when the audit proceedings
related to Con Ed’s 1997 tax year were concluded, that events “trigger[ed] necessarily [the]
contemplation of litigation” with respect to the EZH transaction.
Because the same “anticipation of litigation” standard controls both the work
product and document preservation inquiries, the Court’s determination that Con Ed could not
have anticipated litigation for purposes of work product protection in late 1997 precludes a
determination that the Company had an obligation to preserve evidence at that time. In the
converse situation, this Court has recognized that “[i]t would be incongruous for the Court to
find that Defendant had a duty to preserve documents for discovery because of impending
litigation, yet could not assert the work product doctrine to protect documents prepared in
anticipation of that litigation.” AAB Joint Venture, 75 Fed. Cl. at 445. The Court’s ruling that, in
1997, Con Ed foresaw a probable audit in 1997, but that its documents did not reflect the
requisite “anticipation of litigation” under the objective standard, is the law of the case.
Accordingly, Con Ed’s obligation to preserve evidence for potential litigation did not accrue at
that time, and must have arisen at a later time. For the reasons explained above, that obligation
arose in 2005.
Prior to and in the years following the EZH transaction, Con Ed officials stored a
large volume of documents—including transaction documents, drafts, memoranda, copies of
email, faxes, and other materials—in its CED transaction-related files, its executives’ individual,
business-related files, and on the computer hard drives of Con Ed’s and CED’s executives and
employees. When these materials and documents related to other transactions were produced
during discovery pursuant to the Court’s orders, they included approximately 490,000 pages of
information, including Mr. Scher’s personal files, which were produced after the June 6 ruling.
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All of this material was provided to the government; indeed, the defense has, to date, focused its
presentation largely on documents that were produced from Con Ed’s files.
The government’s questions during depositions, pre-trial filings, and its opening
statement make clear that its spoliation claim will focus on whether Con Ed should have
implemented additional procedures to retain potentially relevant evidence. For instance, the
government’s statements and questions have related to whether electronic mail may have been
routinely deleted from its server beginning in 1997; whether the Company should have taken
additional steps to collect back-up tapes (or otherwise preserve electronic data) when CED
changed its email from an outside vendor in late 2000; and whether additional steps should have
been taken during 2001 to preserve potentially relevant documents when Con Ed responded to
the IRS’s IDRs. Oct. 17, 2001 Tr. at 100-01. To the extent questions of this nature are posed at
trial, they lack foundation, are irrelevant, and are inconsistent with this Court’s previous ruling.
More fundamentally, such questions would allow the government to have it both ways, and
would be manifestly unfair to Con Ed and Mr. Scher, because (among other reasons) all of Mr.
Scher’s files and mental impressions regarding the EZH and other LILO transactions considered
by the Company have been provided to the government. The government should not be
permitted to obtain this material on the basis that Mr. Scher lacked the requisite anticipation of
litigation (and thus did not create work product protected material), while, in the same lawsuit,
be allowed to benefit from an argument that Mr. Scher did anticipate litigation in 1997, 2000, or
2001, and thus should have issued a hold order such that additional, alleged documents would
have been preserved.
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As demonstrated above, Con Ed did not have a legal duty to preserve documents for
future litigation until late 2005. Accordingly, questions regarding additional steps that might
have been taken to preserve electronically stored information should not be permitted.
The Government Was Not Entitled To Obtain Discovery Of
Electronically Stored Information Containing Embedded Data
Based on its opening statement, the government also apparently will attempt to
demonstrate that Con Ed improperly failed to preserve certain electronic documents in a manner
that would allow production of embedded data from those documents. Specifically, the
government asked whether purportedly missing electronic documents
might show the unedited thoughts of Con Ed personnel and . . .
provide answers to questions such as: Why was the noneconomic
factor analysis taken out of certain documents? What was the
answer to the query about the strategic ground cover in the white
paper if Con Ed never intended to go into the Netherlands? . . .
Who, in fact, made those red line comments to plaintiff's own
internal presentation [the leasing white paper]?
October 17 Tr. at 102. The government thus raises questions—and accuses Con Ed of
spoliation—on the basis that it did not obtain data embedded in the computer files on which the
original electronic documents were stored.
Embedded data consist of “draft language, editorial comments, and other deleted matter”
that are stored “in an electronic file but [are] not . . . apparent to the reader.”2 The government
will presumably attempt to show that, if retained, embedded data could have provided the source
of some of the comments that could not be ascertained by asking witnesses for their
2 Electronic Discovery Amendments to the Fed. R. Civ. P., cmt. to 26(f). The new e-
discovery rules have not yet been adopted by this Court, but the definitions of terms cannot be
seriously disputed, and the new federal rules—and developing best practices discussed below—
constitute highly persuasive authority. Although the same rules generally apply, it should be
noted (for clarity) that embedded data is distinct from frequently referenced “metadata,” which is
stored information “describing the history, tracking, or management of an electronic file” and is
also “not usually apparent to the reader viewing a hard copy or a screen image.” Id.
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recollections, or the government will contend that this data could have provided information
regarding why certain statements which appeared in early drafts of internal documents were later
removed. Even if Con Ed had been required to retain the embedded data for litigation—and, as
explained above, it was not—the government’s attack is flawed, as defendant failed to establish a
right to obtain such information. That said, numerous copies of these drafts were provided
during discovery, and as part of a Rule 30(b)(6) deposition, defendant was able to determine who
made certain comments in various drafts; it was not entitled to additional information.
The government did not specifically seek, and failed to make the showing necessary to
obtain, embedded data for the documents at issue (or any other documents). As many courts
have recognized, “[e]merging standards of electronic discovery appear to articulate a general
presumption against the production of metadata” and similar embedded data. Wyeth v. Impax
Labs, Inc., No. Civ. A. 06-222-JJF, 2006 WL 3091331, at *2 (D. Del. Oct. 26, 2006) (not
reported). Generally, a responding party must only produce the native format of such electronic
documents, which permits analysis of embedded and metadata, after a requesting party
specifically seeks such production and “demonstrate[s] a particularized need for the native
format.” Wyeth, 2006 WL 3091331, at *2. The government made no such request or showing
with respect to any of Con Ed’s documents, which were produced in the default standard of
image files (e.g., TIFF files). See id.
Although this Court has not yet adopted the new federal e-discovery rules (as noted
above, see note 2), that judicial decision does not affect the proper outcome regarding any claims
the government may make with respect to embedded data in this case. The Federal Rules
Advisory Committee did not adopt proposals to mandate any particular form of production and
did not take a position on the need to produce metadata, instead “emphasiz[ing] the need to
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discuss this topic early to attempt to reach agreement.” The Sedona Principles (2d): Best
Practices Recommendations For Addressing Electronic Document Production at 8 (June 2007)
As there is no specific mandate to produce embedded data, the government would have needed
to make a specific request for metadata and embedded data, and demonstrate a particularized
need, during discovery to squarely present this issue. Defendant failed to do so. Accordingly,
there is no foundation for questions regarding potentially embedded data, and an examination
regarding the preservation of such data would be irrelevant and should not be permitted.
For the reasons set forth above, Con Ed respectfully requests that the Court rule that
potential examination regarding an alleged pre-2005 obligation to preserve material evidence or
with respect to potential embedded data is not allowed, as it lacks foundation and/or is irrelevant.
s/ David F. Abbott
DAVID F. ABBOTT
MAYER BROWN LLP
New York, NY 10019-5820
Tel (during trial): (202) 280-2421
Fax (during trial): (202) 347-0404
MARCIA G. MADSEN
MAYER BROWN LLP
Counsel for Plaintiff
November 5, 2007