New York Appellate Court: Disintegration of Business Relationship Requires Preservation of ESI

Recently in VOOM v. EchoStar, 2012 NY Slip Op. 00658 (Jan. 31, 2012) the Supreme Court, Appellate Division of New York entered upheld a lower court’s decision imposing sanctions against EchoStar for spoliation of ESI. The most striking portion of this decision is the requirement that when a business relationship disintegrates and a party terminates a contract, it should reasonably anticipate litigation and implement a litigation hold.

The Appellate Division noted that the standard for preservation was that adopted in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D. NY 2003) and Pension Comm. Of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 685 F. Supp. 2d 456, 473 (S.D.NY 2010). Here the Appellate Division of the Supreme Court clearly adopted the standard from two federal district court decisions. The Appellate Court noted that the standard for preservation set forth in both cases “has been widely adopted by federal and state courts.”

The applicable standard should now be well-known to those involved in the industry. The Appellate Division noted that “In Zubulake, the federal district court stated, ‘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.” The Appellate Court stated that the Zubulake standard “is harmonious with New York precedent in the traditional discovery context, and provides litigants with sufficient certainty as to the nature of their obligations in the electronic discovery context and when those obligations are triggered.”

In this case, Voom and EchoStar entered into an contract in which EchoStar agreed to distribute Voom’s television programming. EchoStar allegedly wanted to end the contract or change its terms. EchoStar sent letters to Voom alleging “material breaches” of the contractual programming requirements. Voom became concerned that the matter was going to be litigated and implemented a litigation hold, including automatically preserving emails. EchoStar’s auditor concluded the Voom had complied with the terms of the agreement. EchoStar began discussing “potential litigation” and these discussions continued until Voom filed suit. EchoStar did not implement a litigation hold until after Voom filed suit. This litigation hold did not suspend EchoStar’s automatic deletion of emails. So, emails sent and deleted by an employee were automatically and permanently deleted after seven days. Not until four months after filing of the lawsuit and one year after EchoStar was on notice of anticipated litigation did EchoStar suspend automatic deletion of relevant emails.

Voom sought spoliation sanctions from the court and its motion was granted. The court found that “EchoStar’s concession that termination would lead to litigation, together with the evidence establishing EchoStar’s intent to terminate, its various breach notices sent to VOOM HD, its demand and express reservation of rights, all support the conclusion that EchoStar must have reasonably anticipated litigation prior to the commencement of this action.”

From the decision it is difficult to understand how EchoStar conceded that termination would lead to litigation. It is also unclear from the decision how the courts knew that “EchoStar executives began discussing ‘potential litigation’ but the Appellate Court did note that according to privilege logs, those conversations continued until Voom filed suit. If those concessions had not taken place, would the outcome have been different? Certainly the courts would not have found that litigation was reasonably anticipated just because EchoStar sent breach notices to Voom and its demand and express reservation of rights under the agreement would not have been enough.

Or would it? EchoStar argued that “in the absence of pending litigation’ or notice of a specific claim,’ defendant should not be sanctioned for discarding items in good faith and pursuant to normal business practices.” The Appellate Division disagreed, stating “[t]o adopt a rule requiring actual litigation or notice of a specific claim ignores the reality of how business relationships disintegrate.” The Court said that both sides may appear to be attempting to work things out while frantically preparing for litigation behind the scenes. The Appellate Court noted that to adopt EchoStar’s argument would encourage parties who actually anticipate litigation, but do not yet have knowledge of a “specific claim” to destroy documents with impunity.

The Appellate Court stated that EchoStar should have reasonably anticipated litigation on the date it sent a letter to Voom demanding an audit and threatening termination of the contract. The Court said this was especially true in light of testimony that EchoStar knew that Voom would sue if EchoStar terminated the agreement.

But what if EchoStar did not know whether Voom would sue if it terminated the agreement? Contracts are terminated every day without knowledge whether or not the other party will sue. Does the Appellate Division really suggest that in each case a litigation hold must be implemented? The decision could certainly be read to require such litigation holds. This would certainly broaden the scope of the “reasonably anticipated” standard of litigation holds.

The courts also noted that EchoStar relied upon its employees to determine which emails were relevant in response to litigation and to preserve them by moving them into separate folders. The court noted “EchoStar’s purported litigation hold failed to turn off the automatic delete function and merely asked its employees—many of whom, presumably were not attorneys—to determine whether documents were potentially responsive to litigation, and to then remove each one from EchoStar’s pre-set path of destruction.” Clearly, this behavior is not appropriate.

The trial court concluded that relevant documents had been destroyed by EchoStar. The court also noted that even if the duty to preserve began on the date of the filing of the complaint, EchoStar still violated its duty since it lost several emails over a four-day period. The Appellate Division held that the destruction of ESI was in bad faith and with gross negligence and, therefore, Voom did not need to prove the relevance of the evidence.

The Appellate Division upheld the sanctions imposed by the trial court. But, did it go too far in its analysis?

posted by Gene Petty @ 10:26 PM