NYS Appellate Division Upholds Federal Standard for Spoliation of Electronic Evidence

by Mike Mintz on February 6, 2012 · 0 comments

in Corporate Counsel,Corporate counsel issues,Legal News and Trends,martindale.com

A recent unanimous  New York State Appellate Division decision in VOOM Holdings v. EchoStar Satellite LLC 600292/08 (1st Dep’t, 1/31/12) represented the first time a New York State court applied the federal standard for the spoliation of electronic evidence set out in the New York Southern District case Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003).  The Zubulake standard provides that  ”Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents” (Zubulake, 220 FRD at 218). According to the First Department, the Zubulake standard not only comports with New York case law in the arena of traditional discovery, it also provides a measure of certainty regarding the nature of a litigant’s obligations in the electronic discovery context and when those obligations are triggered.

Background

The parties entered into a fifteen year contract in which EchoStar agreed to distribute Voom’s television programming. However, Voom contends, that a couple of years after the parties executed the contract, EchoStar determined that the deal was disadvantageous, and sought a way to get out of the contract by making false claims about Voom’s financial commitments and obligations. Shortly afterwards EchoStar prepared a breach letter, claiming that Voom did not live up to its end of the agreement and that EchoStar consequently had the right to terminate the agreement. Shortly thereafter Voom became concerned that the dispute was headed to litigation and immediately initiated a litigation hold, including a notice that EchoStar automatically preserve e-mails.  After communication between the parties in which EchoStar continued to maintain that Voom was in material breach of the contract, claims that Voom strenuously denied, EchoStar terminated the contract. Voom instituted the instant action the very next day. Voom’s litigation hold did not stop EchoStar from automatically deleting e-mails which meant that e-mails were automatically purged after seven days. It was not until four months after the litigation was commenced and a year after Voom first notified it of the litigation hold that EchoStar suspended the automatic deletion of e-mails.  During these four months, EchoStar merely asked its employees to decide which documents could be relevant to the litigation, and to then preserve them.  Most of these employees were not attorneys.

Voom subsequently moved for spoliation sanctions.

The Lower Court’s Opinion

The court rejected EchoStar’s claim that it could not have reasonably anticipated the litigation because it was trying to work things out amicably with Voom. The court noted that many times parties try to resolve matters amicably while, at the same time, frantically preparing for litigation.   This does not obviate a party’s duty to preserve evidence.  EchoStar’s behavior constituted bad faith and the court held that an adverse inference at trial was the proper sanction. However, the court refused to strike EchoStar’s answer since other evidence remained available to Voom.

The Appellate Division’s Opinion

The Appellate Division agreed with the lower court’s awarding of sanctions against EchoStar. The Appellate Division cited Zubulake in which the federal court asserted that once a party should reasonably anticipate litigation it is obligated to  preserve relevant documents.   ”[I]n the world of electronic data, the preservation obligation is not limited simply to avoiding affirmative acts of destruction. Since computer systems generally have automatic deletion features that periodically purge electronic documents such as e-mail, it is necessary for a party facing litigation to take active steps to halt that process.”  (Zubulake, 220 FRD at 218). Furthermore, the decision over which documents to preserve should not be left to layman-employees but rather should be made with counsel’s input.

The court rejected EchoStar’s claim that the “reasonably anticipate litigation” standard is too vague to be enforced, instead recognizing that parties to a business dispute might look like they are working things out while in reality they are busy preparing for litigation behind the scenes. A party can reasonably anticipate litigation when it is on notice of a credible probability that it will be involved in litigation, seriously thinks of commencing litigation on its own or takes specific actions to commence litigation. Under any of these standards, EchoStar should have reasonably anticipated litigation. EchoStar took several steps to terminate the parties’ agreement, even over Voom’s strenuous objections. Additionally, EchoStar did not initiate a litigation hold until after the lawsuit started. Moreover, EchoStar had already been sanctioned for similar conduct in a different case and in the previous case, EchoStar’s e-mail retention policy was three times longer than it was at the time of the Voom litigation.

Standard for Sanctions on Spoliation of Evidence Claim

The standard for seeking sanctions based on a spoliation of evidence claim must show: (1) that the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a “culpable state of mind”; and finally, (3) that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense (see Zubulake, 220 FRD at 220). A “culpable state of mind” for purposes of a spoliation sanction includes ordinary negligence (id.; see also Treppel v Biovail Corp., 249 FRD 111, 121 [SD NY 2008]). In evaluating a party’s state of mind, Zubulake and its progeny provide guidance. Failures which support a finding of gross negligence, when the duty to preserve electronic data has been triggered, include: (1) the failure to issue a written litigation hold, when appropriate; (2) the failure to identify all of the key players and to ensure that their electronic and other records are preserved; and (3) the failure to cease the deletion of e-mail (see Pension Comm. of the Univ. of Montreal Pension Plan v Banc of Am. Sec., LLC., 685 F Supp 2d at 471). [*9]

The intentional or willful destruction of evidence is sufficient to presume relevance, as is destruction that is the result of gross negligence; when the destruction of evidence is merely negligent, however, relevance must be proven by the party seeking spoliation sanctions (id.).

However, a presumption of relevance is rebuttable:
“When the spoliating party’s conduct is sufficiently egregious to justify a court’s imposition of a presumption of relevance and prejudice, or when the spoliating party’s conduct warrants permitting the jury to make such a presumption, the burden then shifts to the spoliating party to rebut that presumption. The spoliating party can do so, for example, by demonstrating that the innocent party had access to the evidence alleged to have been destroyed or that the evidence would not support the innocent party’s claims or defenses. If the spoliating party demonstrates to a court’s satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction might still be required.”  (Voom Slip Op. at 13-15)

The Appellate Division’s Conclusion

The appellate court concluded that  EchoStar acted in bad faith in destroying electronically stored evidence, noting that EchoStar was well aware of its preservation obligations. At best, EchoStar committed gross negligence, at worst its actions were intentional. The court determined that the imposition of an adverse inference was a reasonable sanction in light of EchoStar’s culpability and the prejudice to Voom. The destroyed evidence’s relevance was presumed. Voom did not have to establish it. The court refused to strike EchoStar’s answer because the absence of the deleted documents was not fatal to Voom’s case.

The Voom action serves as a warning to all potential litigants on the state level to implement the necessary guidelines which will serve to prevent the automatic destruction of potentially relevant electronic documents in the event of future law suits.  Corporate counsel would be best served to raise this issue with the executive branch long before it becomes a pressing issue.

 

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