Memo to KPMG: When a federal judge sends a strong signal that she doesn't want to show up her magistrate judge, you should heed the warning.

In January, you may recall, U.S. District Judge Colleen McMahon of Manhattan federal court attempted to moot a hot e-discovery dispute between the audit firm KPMG and a putative class of audit associates suing KPMG for unpaid overtime. The federal magistrate overseeing discovery in the case had ordered KPMG to preserve the computer hard drives of every potential class member, including those who had left the firm. KPMG's lawyers at Sidley Austin argued that storing the hard drives could end up costing more than the plaintiffs' claims are worth. The Chamber of Commerce and the International Association of Defense Counsel piled on, asserting that the magistrate's e-discovery order had the potential to fundamentally change the balance of power in class actions by making it too expensive for KPMG and other defendants in similar situations to continue litigating cases against them.

McMahon was clearly reluctant to second-guess U.S. Magistrate Judge James Cott, so in a Jan. 3 order conditionally certifying a class of audit associates, she hinted that her ruling, which focused on a classwide question of KPMG's policy rather than individualized facts, had mooted the e-discovery flap. KPMG and the plaintiffs, represented by Outten & Golden, declined to take the hint. KPMG continued its call for McMahon to overturn the magistrate's discovery order.

On Friday, McMahon said no -- and blamed KPMG for the predicament. Significantly, the judge agreed with KPMG's amici that "proportionality is necessarily a factor in determining a party's preservation obligations." She said that it doesn't make sense for the cost of retaining e-discovery to outweigh the potential value of the information that's being preserved. But McMahon's 22-page opinion concluded that KPMG had been so obdurate in refusing access to the hard drives that she couldn't conduct a proportionality analysis.

"Even assuming that KPMG's preservation costs are both accurate and wholly attributable to this litigation -- which I cannot verify -- I cannot possibly balance the costs and benefits of preservation when I'm missing one side of the scale (benefits)," McMahon wrote. "KPMG cannot simultaneously demand that the court analyze how long every audit associate worked and what every audit associate did and also ask the court to sanction the destruction of what is probably the single best source of that information. In short, KPMG is hoist on its own petard."

The judge said KPMG must preserve the hard drives until it either agrees to a sampling methodology with the plaintiffs (which is what the magistrate had urged) or abandons its argument that even if audit associates, as a class, are entitled to overtime, some class members are exempt because of their particular work. Otherwise, McMahon said, it can only destroy hard-drive evidence when the class opt-in period is over (and even then, only evidence that doesn't pertain to a putative class of New York audit associates).

"We're pleased that the court saw the issue the way she did," said class counsel Justin Swartz of Outten & Golden. "The ruling underscores the point that defendants like KPMG are unlikely to find themselves in this situation if they are willing to be reasonable on the front end." Swartz said he's deep in discovery on the classwide questions McMahon raised in her certification order; after all, he said, the class's wage-and-hour claims -- and not the e-discovery dispute -- are the real focus of the case.

KPMG counsel Steven Catlett of Sidley said he was not immediately available for comment.

(Reporting By Alison Frankel)

(Corrects misreported quote from Swartz that said Judge McMahon "understood the point that defendants like KPMG are unlikely to find themselves in this situation if they are willing to be reasonable on the front end.")