NEW YORK STATE APPELLATE DIVISION ADOPTS FEDERAL ZUBULAKE STANDARDS FOR E-DISCOVERY PRESERVATION OBLIGATIONS

Transcription

1 February 6, 2012 NEW YORK STATE APPELLATE DIVISION ADOPTS FEDERAL ZUBULAKE STANDARDS FOR E-DISCOVERY PRESERVATION OBLIGATIONS Introduction Last week, the First Department of the New York Supreme Court Appellate Division issued a longanticipated decision that provides crucial guidance to the state bar as to when preservation duties arise in the electronic discovery context. In VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., No /08, 2012 NY Slip Op (N.Y. App. Div. Jan. 31, 2012) ("VOOM HD"), the First Department adopted the standard set forth in the influential line of federal cases issued by Southern District of New York Judge Shira A. Scheindlin, namely Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003) and, more recently, Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010). Those cases, and many others that followed, held that the duty to preserve documents, including electronically stored information ("ESI"), arises when litigation is "reasonably anticipated." The VOOM HD decision is noteworthy in that it expressly clarifies for the first time that preservation duties in New York State courts are to be analyzed under the same strict framework articulated by the federal courts and that failure to take appropriate measures may result in severe spoliation sanctions. Background As set out in the decision, in 2005, plaintiff VOOM entered into an "affiliation agreement" with defendant EchoStar, a provider of direct broadcast satellite TV services, under which EchoStar agreed to distribute VOOM's TV programming. The agreement required EchoStar to include VOOM channels in its HD program service packages, prohibited tiered pricing, and afforded EchoStar "the right to terminate the agreement if [VOOM] failed to spend $100 million on the 'service' in any calendar year," as well as the right to audit VOOM's financials. See VOOM HD at *2. VOOM alleged that "in mid-2007, EchoStar determined that the deal was disadvantageous, and therefore decided to falsely claim that [VOOM] had fallen short of its financial commitment... or had failed to meet its programming content obligations. [And that, as early as June 2007], EchoStar allegedly sought to terminate the contract or to 'tier' [VOOM's] channels". Id. As early as June 2007, EchoStar executives sent communications inquiring about the possibility of ending the companies' agreement and breach remedies. Id. Specifically, on June 19, 2007, EchoStar's senior corporate counsel began sending letters to VOOM advising of EchoStar's intent "to avail itself of its audit right[s]" and alleging that VOOM had failed to meet its spending requirement, thus entitling EchoStar to terminate the agreement. Id. at *3. Subsequently, in July of that year, EchoStar sent VOOM additional letters, "claiming 'material breaches.'" Id. This exchange of correspondence continued throughout July, Attorney Advertising Kramer Levin Naftalis & Frankel LLP

2 September and October of The privilege logs produced during the litigation demonstrated that EchoStar began discussing "potential litigation" in October 2007, even after it had triggered an audit of VOOM, from which the auditor reported "[e]verything at Voom looks fine... these guys are clean... very organized, forthcoming, and from an accounting perspective run a good shop." Id. In mid-january 2008, EuroStar executives exchanged s "stating that EchoStar was proceeding with 'the plan for a full termination.'" Id. at *4. On January 30, EchoStar formally terminated the agreement. Id. VOOM filed suit the next day. Id. Six months prior to the commencement of the litigation, in July of 2007, VOOM had become "'extremely concerned' that the matter was going to be litigated and implemented a litigation hold, including automatically preserving s." Id. at *3. EchoStar, however, did not implement its litigation hold until after VOOM filed its January 2008 lawsuit, and it did not suspend its automatic deletion program for four additional months. Id. at *4. VOOM Seeks Sanctions for Spoliation VOOM eventually sought sanctions for spoliation of evidence by EchoStar. Among the facts considered by the trial court in granting the motion and instructing that an adverse inference would be given at trial as against EchoStar were: (1) the late date upon which the litigation hold was implemented; (2) that the "litigation hold" did not immediately suspend EchoStar's automatic deletion of s; (3) that the litigation hold charged non-attorney employees with the task of determining whether documents were potentially responsive to litigation, and then tasked them with removing each one from EchoStar's "preset path of destruction" into a foldering-system; and (4) that EchoStar did not take "snap shots" of relevant accounts until four days after the action began. Id. at **4-5. The well-known and widely adopted federal Zubulake standard states 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 [and ESI]." Zubulake, 220 F.R.D. at 218. According to Zubulake, and its progeny Pension Committee, parties' e-discovery obligations include the implementation of a litigation hold, once a party reasonably anticipates litigation, that (a) directs appropriate employees to preserve all relevant records, electronic or otherwise; (b) creates a mechanism for collecting the preserved records so they might be searched by someone other than the employee; (c) describes the ESI at issue with as much specificity as possible; (d) directs that routine destruction policies such as auto-delete functions cease; and (e) describes the consequences for failure to preserve ESI. See Pension Comm, 685 F. Supp. 2d at The First Department in VOOM HD outright rejected as "manifestly without merit" EchoStar's argument that the Zubulake standard is "vague and unworkable because it provides no guideline for what 'reasonably anticipate[s]' means." Id. at *7. Applying Zubulake's standard of "reasonable anticipation of litigation" as the trigger for retention, the trial court found - and the First Department affirmed - that EchoStar "must have reasonably anticipated litigation prior to the commencement of this action," and "no later than June 20, 2007, the date that EchoStar sent VOOM a written letter containing its express notice of breach, a demand, and an explicit reservation of rights." Id. at *4. The court also rejected EchoStar's arguments that since the parties were communicating and attempting to amicably resolve their dispute that no reasonable anticipation of litigation existed, opining that EchoStar's arguments ignore the practical realities of business relationships and the fact that parties often discuss settlement before and during litigation, "but this does not vitiate the duty to preserve." Id. at *5. "EchoStar's argument would allow parties to freely shred documents and purge s, simply by faking a willingness to engage in settlement negotiations." Id. 2

3 In upholding the motion court, the First Department not only adopted the Zubulake standards, it also looked to The Sedona Conference (a think tank comprised of jurists, lawyers, experts, academics, and others), for clarity lacking in the Zubulake line of cases as to when litigation can be reasonably anticipated. The Sedona Conference, Commentary on Legal Holds: The Trigger and The Process, Guideline 1 elaborates on and clarifies the Zubulake standard as follows: "a reasonable anticipation of litigation arises when an organization is on notice of a credible probability that it will become involved in litigation, seriously contemplates initiating litigation, or when it takes specific actions to commence litigation." Id. at *7 (citing 11 Sedona Conf. J. 265, 269 (Fall 2010)). Under "any variant" of the standard, the First Department held that as of June 20, 2007, EchoStar "should have reasonably anticipated litigation." Id. The First Department also affirmed the lower court's finding of gross negligence. In light of the facts, "EchoStar's failure to preserve electronic data was more than negligent; indeed, it was the same bad faith conduct for which EchoStar had previously been sanctioned." Id. at *5 (citing Broccoli v. EchoStar Commc'ns Corp., 229 F.R.D. 506 (D. Md. 2005)). "EchoStar had been on notice of its 'substandard document practices'... yet continued those very same practices.... EchoStar's conduct, at a minimum, constituted gross negligence." Id. Indeed, the relevant s were only produced by luck, because the s were captured in "snap shots" of certain employees' accounts taken for the purpose of other litigations. Adverse Inference Instruction Upheld Under the Zubulake framework, a party seeking an adverse inference instruction must demonstrate that (1) 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'" (defined as negligence or more); and (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 F.R.D. at 220. Given the finding that the obligation to preserve its ESI arose in June 2007, as the point at which EuroStar could reasonably have anticipated litigation, coupled with the finding that its conduct was at best gross negligence, prongs (1) and (2) of Zubulake were deemed met. The First Department then turned to the third prong concerning the relevance of the destroyed evidence. VOOM HD at **8-9. 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 proved by the party seeking spoliation sanctions." See id. at *9 (citing Pension Committee, 685 F. Supp. 2d at 471). The presumption of relevance is rebuttable. The spoliating party may be able to rebut the presumption by demonstrating, for example, "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." See id. (citing Pension Committee, 685 F. Supp. 2d at ). The First Department held that VOOM "had demonstrated that the destroyed evidence was relevant to its claims [and]... in any event, relevance is presumed when a party demonstrated gross negligence in the destruction of evidence." Id. As such, it upheld the lower court's ruling that an adverse inference against EchoStar at trial was an appropriate sanction. "An adverse inference was a reasonable sanction in light of EchoStar's culpability and the prejudice to VOOM. The record shows that EchoStar acted in bad faith in destroying electronically stored evidence." Id. Thus, the sanction of an adverse inference instruction was warranted. An alternative remedy - striking EchoStar's answer - was deemed inappropriate since other evidence remained available to VOOM to prove its claims. Id. at *

4 Written Litigation Hold Notices May Not Be Necessary In a minor but notable departure from Zubulake and Pension Committee, which appear to suggest that a written litigation hold notice is mandatory, the court in VOOM in a footnote characterized a written hold as a "best practice" and indicated that "there might be certain circumstances, for example, a small company with only a few employees, in which an oral hold would suffice." See VOOM HD at *6 n.2. This suggests that state courts may be more flexible than New York federal courts with respect to the types of litigation hold instructions that are required to be conveyed at the time that litigation is reasonably anticipated. Conclusion The New York Appellate Division's VOOM HD decision is a landmark decision for the state court system because it expressly clarifies that ESI preservation standards will largely follow the trail blazed by the federal courts in the last several years. This likely means that litigants in state court cases will in the future be held to higher standards than they were in the past. However, the decision also provides a measure of consistency as between the two court systems, particularly in the phase prior to the filing of a lawsuit when it may not be clear in which court the anticipated case will be filed and what preservation standards apply. In light of VOOM HD, parties remain well-advised to implement preservation procedures and to circulate litigation holds (in accordance with best practices) as soon as practicable once litigation is reasonably foreseeable - a fact-specific determination for which consultation with counsel may be crucial. Kramer Levin served as counsel of record to UBS Warburg LLC during the litigation of the electronic discovery issues in Zubulake v. UBS Warburg LLC. 4

5 If you have any questions or need additional information about this Alert or any electronic discovery topic, please contact: Norman C. Simon Litigation Partner E-Discovery Practice Chair Brendan M. Schulman E-Discovery Counsel Special Counsel Samantha V. Ettari Litigation Associate * * * *** This memorandum provides general information on legal issues and developments of interest to our clients and friends. It is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters we discuss here. Should you have any questions or wish to discuss any of the issues raised in this memorandum, please call your Kramer Levin contact. Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, NY Phone: Marsh Road Menlo Park, CA Phone: avenue Hoche Paris Phone: (33-1)