Court File and Parties

COURT FILE NO.: 53982/12 DATE: June 16, 2016 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Verge Insurance Brokers Limited, 172968 Ontario Inc., Marick Bros. Investments Inc. and Mark Sherk, Plaintiffs

AND:

Richard Sherk, Daniel Sherk, Martin, Merry & Reid Limited and Cal Schulz Insurance Brokers Ltd., Andree Senn, Brenda French and Ruth Pluska, Defendants

BEFORE: Turnbull, J.

COUNSEL: Stephen F. Gleave/ Richelle M. Pollard, for the Plaintiffs, George Limberis, for the defendant Daniel Sherk

HEARD: June 6, 2016

Endorsement

Daniel Sherk’s motion to compel production

[1] The defendant Daniel Sherk has brought a motion seeking the following relief:

1. An order for the plaintiffs to produce the backup tapes (66 tapes) of the corporate defendant Verge and for Deloitte to restore and review for relevancy and provide Dan with a report of same, pursuant to the order of Quinn, J. dated March 19th, 2015.
2. Alternatively for an order for the plaintiffs to provide evidence that they have in fact restored all the backup tapes by providing supporting documentation, steps taken and the outcome demonstrating the backup tapes were reviewed and to provide a hard copy or an electronic copy of all the emails to Deloitte to review for relevancy pursuant to Quinn, J.’s order dated March 19th, 2015.
3. An order that the plaintiffs pay Deloitte’s costs for either option 1 or 2 above of this motion on a substantial indemnity basis.

Background

[2] The Defendant Daniel Sherk was an employee of Verge Insurance Brokers. In 2012, his father and co-defendant Richard Sherk retired from Verge. Shortly thereafter Verge became convinced that Richard was attempting to involve himself in a competitive insurance brokerage business and in the process was trying to lure customers from Verge. Not long after his father retired, the employment of Daniel Sherk was terminated by Verge. Daniel alleges he was wrongfully dismissed. He has asserted that claim in a counterclaim in this action. Verge in this action has claimed that Daniel has conspired with the other defendants to lure customers from Verge and cause it damage.

[3] In the course of these lengthy proceedings, the plaintiffs brought a motion for production and the defendants brought a cross motion in which the parties sought specific relief with respect to compelling further production by the opposing parties. This resulted in a series of orders issued by Quinn, J. The order which is of greatest relevance to his motion is the order of March 19th, 2015.

[4] That order was not a consent order. Counsel have not been able to provide consent or minutes of settlement to reflect the fact that it was a consent order.

[5] Paragraph 1 of that order provides as follows:

1. This court orders that the plaintiffs shall produce a revised schedule A and a further and better affidavit of documents in a complete and unreacted form containing the following: a) All internal and external communications of the plaintiffs and employees as defined below, which includes emails, texts, blackberry messages, faxes, letters, whether together or not, whether in printed or electronic form, between the current and former employees, directors and officers of Verge Insurance Brokers Limited, current and former clients contained in the defendant Daniel’s book of business and insurance companies’, specifically Intact Insurance, Aviva Insurance, Dominion of Canada General Insurance Company and Royal and Sun Alliance Insurance company, (“Insurance Supplier”), in the period of January 2011 to December 2014 (“the Additional Document”), regarding the following relevant matters:

[6] Thereafter the order in very great detail requires production of such documents covering a broad range of issues related to the litigation.

[7] Paragraph 5 of Quinn, J.’s order of March 19th, 2015 provided as follows:

“This court orders that the employees’ and Mark’s employees and Mark Sherk’s Identified Media Devices and Email Accounts be produced to Deloitte for a forensic inspection to be conducted at the cost of the defendant Daniel Sherk and further that Deloitte produce a report on the state of preservation of the media devices and email accounts, whether there is evidence of deletion or editing of the relevant metadata, and a description of the relevant documents that are recovered on the media devices and email account including any additional documents and to produce such documents to be included in a further and better affidavit of documents in accordance with paragraph 1 above. In order to facilitate the search, counsel shall agree within 15 days of receipt of this order on the terms of a key work search that is consistent with the categories described in paragraphs (1a) – (IX) above, failing which they will return to the court to settle the key word search.

[8] In November 2012, counsel for Verge and counsel for Daniel Sherk exchanged “hold letters”. Essentially, these letters constituted notice to the other party to take all reasonable steps to preserve documents potentially relevant to the litigation. Mr. Limberis’ letter to Mr. Gleave, counsel for Verge provided in part as follows:

“This means that the plaintiffs have an obligation to take all reasonable necessary steps to:

• Ensure that potentially relevant documents (including electronically stored information) are not destroyed loss or relinquished to others, either intentionally, or inadvertently such as through the implementation of an ordinary course document retention/ destruction policy;
• Ensure that potentially relevant documents are not modified, either in the case of electronically stored information (which may be modified by the simple act of accessing the information) or in the case of documents used on an ongoing basis in the operation of the business;
• Ensure that potentially relevant documents remain accessible, particularly electronically stored information, which may require particular forms of software or hardware to remain readable.”

[9] On this motion the court was advised that Verge has a semimonthly backup system in place so that all documents, emails or other correspondence relating to the operation of the Verge business were backed up on tapes. At the time of the hearing of this motion, the court was advised that for the period 2011 – 2014 there were approximately 79 backup tapes containing all the documents for the period 2011 – 2014. Needless to say, hundreds of thousands of documents are backed up.

[10] Mr. Gleave acknowledged that Verge nor its principal Mark Sherk, upon receipt of the “hold letter” at the end of November 2012, did not provide specific instructions to its employees to save copies of documents which may be relevant to the proceedings in this court in a separate archive file.

[11] Mr. Joel Bowers filed an affidavit in support of Verge’s position on this motion. He is the director at Duff and Phelps Canada who is responsible for overseeing the forensic technology and operations aspects of Duffin Phelps. His curriculum vitae indicates that he has considerable experience in working on cases involving digital evidence. He has authored many expert reports and affidavits which have been submitted to various levels of court. In his affidavit he indicated that the primary purpose of the backup tapes at Verge was to act as a redundant copy of information in case an event occurs that renders the information stored in computer systems inaccessible. He noted that many business employ backup tapes as part of their disaster recovery planning.

[12] He noted that from information provided to him, Verge used Arcserve back up software to preform daily backups of their Exchange (email) server. In their backup scheme, the daily backup tapes are overwritten after a 7 day cycle, in addition to the daily backups; he learned that Verge also created biweekly backups as their long term preservation copies. These long term preservation copies formed a permanent data record for Verge’s future use in the event that they became required. He learned that for the relevant time period of 2011 – December 2014, Verge had approximately 79 backup tapes.

[13] Mr. Bowers testified that Verge employees could have preserved emails and other documents by simply using an archive file. He recommended that a PST file should be used. A PST file is a personal file that holds email outside of the exchange server. He testified in his cross examination at question 70 that if all the emails and documents relevant to the matters in dispute that had been added to that particular PST file, only that file would have had to be accessed for relevant documents. This would have resulted in a centralization of all emails potentially relevant to the issues in the litigation.

[14] Verge did not follow that system. Verge simply continued backing up all documents on to its backup tapes.

[15] During the course of this motion, Mr. Gleave admitted that Verge has not reviewed all of its backup tapes to ascertain relevant documents during the calendar years 2013 and 2014 despite paragraph 1 of the order of Quinn, J. dated March 19th, 2015.

[16] Mr. Limberis drew the attention of the court to the following extracts of evidence of Mark Sherk during these proceedings:

• In his affidavit sworn June 10th, 2014, in support of his production motion before Quinn, J. at paragraph 13 he swore that “all relevant documents had been provided.” He further swore that the majority of his correspondence with Verge is done verbally.

[17] In the same affidavit, he swore at paragraph 15:

“As my counsel has advised Daniel on several occasions, all correspondence regarding matters relevant to this litigation has been produced. Daniel’s request to review the correspondence with all of these individuals is overly broad and appears to be a fishing expedition for information that does not otherwise exist. This is particularly evidenced from his request to see the correspondence, between myself, my wife and my daughter Brianne.”

[18] At paragraph 33 of the same affidavit, he swore as follows:

“At the time Verge compiled its affidavit of documents, the backup tapes were reviewed and any documents relative to the litigation were produced. As I mentioned above, there is very little email correspondence of the kind requested by Daniel because of the majority of my business is conducted over the phone.”

[19] Given the above statements made by Mark Sherk, Dan could hardly dispute that he would be responsible for paying the costs of a forensic examination of the backup tapes as reflected in paragraph 5 of the order of Quinn, J. dated March 19th, 2014.

[20] In his examinations for discovery on February 24th, 2016, Mark Sherk swore at question 1537 that he “absolutely” had not reviewed all the backup tapes. He stated that he could not possibly do it because there are hundreds of thousands of emails in there.

[21] At Questions 1546 he stated that he did not consider it his obligation to review those backup tapes to ensure that every and all relevant emails had been disclosed. He stated that it was not possible. He further added that he did not hire a third party to assist Verge in looking at the backup tapes to ensure that all relevant emails were produced. He stated that it was an illogical exercise that he was asked to do.

[22] The defendant has asserted that if he knew that Mark Sherk had not reviewed all the backup tapes pursuant to his obligations under the rules and based on his sworn testimony that he did review all the backup tapes, he would have disputed the costs that he has incurred (apparently these exceed $200,000) to restore and review 13 of Verge’s backup tapes during the production motion.

Analysis

[23] In Palmerston Grain, a Partnership v. Royal Bank of Canada, 2014 ONSC 5134 at paragraph 44, the court identified the Sedona Principles and held they consist of 12 principles some of which may be summarized as follows:

• 1. Electronically stored information is discoverable.
• 3. As soon as litigation is reasonably anticipated, parties must consider their obligation to take reasonable and good faith steps to preserve potentially relevant electronically stored information.
• 5. The parties should be prepared to produce relevant electronically stored information that is reasonably accessible in terms of cost and burden.
• 11. Sanctions should be considered by the court where a party would be materially prejudiced by another party’s failure to meet any obligation to preserve, collect, review or produce electronically stored information. The party in default may avoid sanctions if it demonstrates the failure is not intentional or reckless.
• 12. The reasonable costs of preserving, collecting and reviewing electronically stored information would generally be borne by the party producing it. In limited circumstances, it may be appropriate for the parties to arrive at a different allocation of costs on an interim basis by either agreement or court order.

[24] These principles are applicable to the case at hand. Pursuant to the order of Quinn J., there was a positive obligation on Verge to produce all documents relevant to the litigation. Rule 30.02 of the Rules of Civil Procedure is specifically directed to that obligation.

[25] The fact that Verge chose, even after having received the “hold letter” to simply store all its information on backup tapes without creating an archive file of relevant documents is the responsibility of Verge. The costs necessary to review those backup tapes and identify relevant documents and produce them in an accessible and legible form to the defendant lies upon Verge. Paragraph 1 of Justice Quinn’s order is clear in that respect. That is the first step that Verge was obliged to take in this litigation in fulfilling its duty to produce relevant documents.

[26] Daniel then, pursuant to paragraph 5 of Quinn J.’s order would have the right at his expense to retain Deloitte to review any or all of the tapes to make certain that relevant documents had been produced. The cost of that audit was specifically ordered to be at his cost.

[27] In this particular case, Daniel did retain Deloitte to review thirteen of the tapes. Deloitte identified 144 documents which were deemed to be relevant on the thirteen backup tapes. These documents were not found on the Verge server as they had been deleted from the media devices of Verge employees in the ordinary course of business. These were preserved however on the backup tapes. Upon learning of these possibly relevant documents which had not been produced by Verge, Daniel was of the view that the backup tapes were likely not reviewed by the Plaintiffs to begin with. Hence, he believed that there are possibly relevant communications in the power, possession and control of the plaintiffs which have not been inspected or produced.

[28] In my view, Verge had and still has a positive duty to identify the documents in the 66 backup tapes which may be relevant and to place them in an archive folder. The parties had earlier agreed upon search words to be used in searching for relevant documents and they should be used by Verge in undertaking this task.

[29] Once the documents have been identified, Verge is required, pursuant to the order of Quinn J. to produce an affidavit of documents in compliance with the provisions of paragraph 1 of his order of March 19, 2015.

[30] At that time, Daniel can then exercise his rights under paragraph 5 of the order to retain Deloitte to audit the tapes at his own costs.

[31] The work which was undertaken by Deloitte on the thirteen tapes at Daniel’s cost should have been done by the plaintiffs as part of their obligation to preserve and produce relevant documents. In having the work done, Verge imposed various conditions on Deloitte which increased the time and costs involved in reviewing the backup tapes. For example, Deloitte could only access the tapes on weekends. Deloitte was prevented from removing the tapes offsite in order to have the tapes restored by a third party vendor. Verge required that Deloitte bring in its own staff to assist with the restoration process. Verge further insisted that the backup tapes be encrypted first despite the fact that Deloitte indicated it was not the normal course of practice for that process.

[32] If the plaintiffs had restored all the backup tapes as they were obliged to do to comply with their obligations under the Rules of Civil Procedure and pursuant to the order of Quinn J., they would have been aware of the issues involved from the outset and could have raised their concerns at the time of appearing before Quinn J. or at least before the Deloitte review began at Daniel’s request.

[33] It is ordered that the plaintiffs shall forthwith fully indemnify Daniel for the amounts paid by him to Deloitte for the work done by Deloitte in restoring and analyzing the thirteen backup tapes. This is without prejudice to the right of the plaintiffs to seek indemnification for those expenses in the discretion of the presiding trial judge if they are successful in the cause.

[34] It is ordered that Verge and Mark Sherk shall forthwith restore the remaining 66 backup tapes and produce an amended and full affidavit of documents listing all documents which are relevant to the litigation between the plaintiffs and all defendants in this action.

[35] On this motion, the moving party relied on the affidavit of a student at law to support the motion. She was cross examined on this affidavit and the defendant Daniel Sherk did not file an affidavit, thus avoiding exposure to cross-examination. In Armstrong v McCall, at paras. 32-34, the Court of Appeal has noted that while such affidavits are technically admissible, they deserve to be treated with skepticism and on contentious issues they should be given little weight. On this motion, the affidavits filed by the student at law largely dealt with the steps taken as part of the production battle in this litigation. In the end, they were largely irrelevant to the final decision on this motion as the real issue was the non-compliance with the clear order of Quinn J. dated March 19, 2015 and the plaintiffs’ misstatements relative to their review of all of the backup tapes.

[36] The plaintiffs further submitted that the defendant’s motion should be dismissed as leave was not sought to bring the motion after the matter had been set down for trial as required under Rule 48.04. As the motions judge under Rule 37.15, I granted leave to Daniel’s counsel to bring the motion returnable before me on a fixed date. Hence, I reject that submission.

[37] Counsel for the plaintiffs suggested that Daniel’s motion is a thinly veiled effort to vary Quinn J’s. order without complying with Rule 59.06. I respectfully disagree. This is a motion to enforce an order of Quinn J. and to require the plaintiffs to provide a better and full affidavit of documents in accordance with the provisions of paragraph 1 of the order of March 19, 2015. Furthermore, as earlier stated, that order was not a consent order.

[38] In his affidavit filed in opposition to this motion, Mark has sworn that he has been advised by Deloitte that the cost of the 66 backup tapes could cost as much as $300,000. Counsel for the plaintiffs suggest in their factum filed on this motion that the principle of proportionality of costs militates against requiring the plaintiffs being required to incur such costs. While I would generally agree the costs are exceptional, this litigation has been exceptional in its breadth, venom and expenses. I recently received a bill of costs for Mark’s production motion before Quinn J. which exceeded $300,000. Proportionality is a relative term. The damages sought by the plaintiffs against the defendants in this action exceed a million dollars. In my view, compliance with the order made may be expensive but in the totality of the litigation, the damages claimed and the number and complexity of the motions heard to date, the costs are not disproportionate.

Costs

[39] The defendant has been successful on this motion. If the plaintiffs had complied with the order of Quinn J., this motion would not have been necessary. I see no reason why the defendant Daniel Sherk should not have his costs on a substantial indemnity basis for this motion. I will receive a costs summary and brief written submissions from Mr. Limberis on or before July 1, 2016. A copy shall be served on counsel for the plaintiffs. Counsel for the defendants may serve and file brief written reply materials on or before July 21, 2016.

Turnbull, J Date: June 16, 2016