New York’s Appellate Courts Surface on Litigation Hold – First Department Confirms Reasonable Anticipation of Litigation Requires Implementation of Litigation Hold

New York’s First Department Appellate Division is the first New York state appellate court to expressly adopt the “reasonable anticipation trigger” articulated in Zubulake v. UBS Warburg LLC, 220 FRD 212 (S.D.N.Y. 2003): “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.” Id. at 218. On January 31, 2012, the First Department affirmed the November 9, 2010 Order of the Honorable Richard B. Lowe III which awarded an adverse inference sanction to plaintiff, Voom HD Holdings LLC (“Voom”) against defendant EchoStar Satellite, L.L.C. (“EchoStar”). Voom H.D. Holdings LLC v. EchoStar Satellite LLC, 2012 N.Y. Slip Op. 00658 (1st Dep’t 2012). The First Department found the Zubulake standard to be “harmonious” with existing 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.”

The facts of the Voom case provide a familiar example of the breakdown and souring of relationships between business counterparties in advance of an actual litigation. In mid-2007, EchoStar determined its 15-year “affiliation agreement” with Voom was disadvantageous and, by June 2007, EchoStar’s vice chairman had begun exploring ways to terminate the contract. By July 2007, EchoStar had plainly advised Voom that it believed Voom had committed “material breaches” of the contract and EchoStar reserved its “rights and remedies in equity or at law.” For its part, Voom implemented a litigation hold automatically preserving emails on July 31, 2007; EchoStar did not. Nonetheless, EchoStar continued to threaten Voom with termination of the contract throughout the fall of 2007 and into January 2008. EchoStar’s apparent motivation was to force Voom into retrading the contract resulting in more advantageous terms to EchoStar. On January 30, 2008, EchoStar formally terminated the agreement; Voom brought suit in New York State Supreme Court the following day.

EchoStar issued a “litigation hold” only after Voom commenced suit. Justice Lowe found this hold insufficient for several reasons, including because: (i) the hold did not suspend EchoStar’s automatic and permanent purge of deleted emails 7 days after an email’s deletion; this automatic purge was not suspended until four months after litigation was initiated; (ii) EchoStar relied on its employees — many of whom were presumably not attorneys — to self collect and determine whether documents were potentially responsive to litigation, and to then remove each one “from EchoStar’s pre-set path of destruction.” Most important to the First Department’s adoption of Zubulake, Justice Lowe found the hold to be too little too late in that “EchoStar’s concession that termination would lead to litigation, together with the evidence establishing EchoStar’s intent to terminate, its various breach notices set to [Voom], its demands and express reservation of rights, all support the conclusion that EchoStar must have reasonably anticipated litigation prior to the commencement of this action.” Specifically, Justice Lowe found that EchoStar should have “reasonably anticipated litigation no later than June 20, 2007, the date [EchoStar’s corporate counsel], sent Voom a written letter containing EchoStar’s express notice of breach, a demand, and an explicit reservation of rights.”

Judge Lowe rejected EchoStar’s argument that it was seeking an “amicable business solution” and therefore, no reasonable anticipation of litigation existed: “EchoStar’s argument ignores the practical reality that parties often engage in settlement discussions before and during litigation, but this does not vitiate the duty to preserve. EchoStar’s argument would allow parties to freely shred documents and purge emails, simply by faking a willingness to engage in settlement negotiations.” Finding EchoStar’s conduct constituted gross negligence, Justice Lowe ruled that a negative, or adverse inference against EchoStar at trial was an appropriate sanction.

The First Department affirmed the trial court’s order finding that “an adverse inference was warranted because EchoStar’s spoliation of electronic evidence was the result of gross negligence at the very least.” In doing so, the First Department expressly rejected the argument that the “reasonable anticipation” standard of Zubulake is “vague and unworkable”:

To adopt a rule requiring actual litigation or notice of a specific claim ignores the reality of how business relationships disintegrate. Sides to a business dispute may appear, on the surface, to be attempting to work things out, while preparing frantically for litigation behind the scenes. EchoStar[’s] approach would encourage parties who actually anticipate litigation, but do not yet have notice of a “specific claim” to destroy their documents with impunity.

The Voom decision is notable for at least three reasons in addition to the guidance concerning the timing of implementing a litigation hold. First, while not expressly stating that self-collection in every case is improper, the First Department, citing Pension Comm. Of the Univ. of Montreal Pension Plan, 685 F. Supp. 2d 456, 473 (S.D.N.Y. 2010), found, “[i]n this case, EchoStar’s reliance on its employees to preserve evidence ‘does not meet the standard for a litigation hold.’” Second, the Court found the lower court’s consideration of EchoStar’s sanction for bad faith conduct relating to “substandard document practices” in an unrelated District of Maryland case, Broccoli v. Echostar Commc’ns Corp., 229 F.R.D. 506 (D. Md. 2005), to be proper and warranted in assessing gross negligence: “The [Broccoli] case demonstrates that EchoStar was well aware of its preservation obligations and of the problems associated with its automatic deletion of e-mails that could be relevant to litigation to which it was a party.” Third, the Court did not consider email “snapshots” that included relevant emails for certain relevant time periods that were recovered in connection with EchoStar’s other litigations to be a mitigating factor; to the contrary: “These e-mails — a handful only fortuitously recovered, and highly relevant — certainly permitted the inference that the unrecoverable e-mails, of which the snapshots were but a representative sampling, would have also been relevant.”

The Voom opinion raises difficult questions regarding when companies should decide that pre-litigation negotiations have deteriorated to the point that litigation is “reasonably likely,” and even whether that amorphous standard is an appropriate one on which to base litigation hold trigger decisions. In fact, Lawyers for Civil Justice (“LCJ”), which had filed an amicus brief asking the First Department to overturn Justice Lowe’s verdict, issued a “Special Update” on February 1, 2012 calling the Voom decision a “disappointing setback” and contending that it underscores the need for e-discovery reform. Specifically, LCJ argues that Justice Lowe’s verdict “places an unfair burden on corporations and creates an unattainable standard of practice that will leave even the best intentioned corporations vulnerable to unwarranted legal sanction.” The standard adopted by the First Department, one LCJ member stated, “would vastly inflate costs for corporations as electronic data increases.”

Notwithstanding the controversy surrounding this decision, Voom is instructive for several reasons. Voom should prompt an advocate to make herself aware of a company’s e-discovery past and present with respect to unrelated litigations and to counsel her client to learn from its prior mistakes. Further, it highlights that practitioners should weigh the pros and cons of self-collection. At the very least, where a client has self-collected electronic documents, a practitioner should anticipate opposing counsel’s invocation of this new case in an attempt to impugn that self-collection. Finally, and most significantly, Voom confirms that the duty to preserve electronic evidence is not necessarily synonymous with the commencement of a litigation. Indeed, as in Voom, these obligations can arise months before actual litigation and can be triggered internally when a company reasonably anticipates the commencement of legal action, even when that eventuality may be completely unknown to the future adversary.

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