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February 27, 2012 Articles

New York Appellate Court Adopts Federal E-Evidence Preservation Standard

The Appellate Division, First Department, became the first New York appellate court to adopt the standard for spoliation originally established in Zubulake v. UBS Warburg LLC.

By Yitzchak M. Fogel

On January, 31, 2012, the Appellate Division, First Department, became the first New York appellate court to adopt the standard for spoliation originally established in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). Applying Zubulake’s “reasonable anticipation trigger for preservation” standard, the panel in Voom HD Holdings LLC v. EchoStar Satellite LLC, No. 600292/08, 2012 N.Y. Slip Op 00658 (App. Div. 2012) unanimously held that EchoStar Satellite breached its preservation duty, and affirmed an adverse-inference sanction.

The litigation concerns a 2005 contract between Voom HD and EchoStar Satellite, whereby EchoStar agreed to distribute Voom’s programming through its “Dish Network” service. In the contract, EchoStar agreed to include Voom channels as part of its standard package, and not “tier” it or charge a fee. EchoStar retained the right to terminate if Voom failed to spend $100 million on the service in any calendar year.

Voom alleges that in mid-2007 EchoStar decided that the contract was a bad business decision, but sought to justify its termination by falsely claiming that Voom had failed to meet its programming and spending obligations. In addition, Voom alleges that in June 2007, EchoStar began analyzing its legal remedies in regard to a possible breach of contract.

On June 19, 2007, EchoStar exercised its audit right and contended that Voom failed to spend a sufficient amount in the 2006 calendar year. In response, Voom provided evidence that it satisfied its contractual obligations. This led to an exchange of letters between Voom and EchoStar, wherein EchoStar alleged “material breaches” and reserved its “rights and remedies.” By July 31, 2007, Voom became “extremely concerned” about potential litigation and implemented a litigation hold. EchoStar executives began discussing “potential litigation” with counsel in October 2007. Both companies continued exchanging letters until January 30, 2008, when EchoStar formally terminated the agreement effective February 1, 2008. Voom filed suit the next day.

From June 2007 until February 2, 2008, EchoStar never implemented a litigation hold. In February, it finally did. However, EchoStar did not suspend its automatic deletion of emails until June 1, 2008, four months after being sued and nearly a year after EchoStar was on notice of potential litigation. Until then, EchoStar continued automatically purging all deleted and sent employee emails. Voom only learned of potentially relevant emails because they were captured in “snapshots” of email accounts produced in other litigations.

Voom moved for spoliation sanctions. The motion court granted Voom’s motion and, citing Zubulake, found that EchoStar should have reasonably anticipated litigation by June 20, 2007, when its corporate counsel sent Voom a letter containing a notice of breach, a demand, and a reservation of rights. Noting that EchoStar had previously been sanctioned for failure to preserve documents in another case and, thus, had notice of its “substandard document practices,” the motion court held that EchoStar was grossly negligent, which warranted an adverse-inference sanction.

On appeal, the First Department affirmed. First, it adopted Zubulake’s standard that “[o]nce 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.” Voom, 2012 N.Y. Slip Op at *2 (citing Zubulake, 220 F.R.D. at 218). It further stated that this obligation arises when “a party is on notice of a credible probability that it will become involved in litigation.” Id. at *7. Moreover:

[a] hold must direct appropriate employees to preserve all relevant records . . . and create a mechanism for collecting the preserved records so they might be searched by someone other than the employee. The hold should, with as much specificity as possible, describe the ESI at issue, direct that routine destruction policies . . . cease, and describe the consequences for failure to so preserve . . . [W]here a party is a large company, it is insufficient . . . to vest total discretion in the employee to search and select what the employee deems relevant without the guidance and supervision of counsel.

Id. at *6.

The court rejected EchoStar’s argument that the Zubulake standard is vague and unworkable, and that an “actual litigation or notice of a specific claim” standard be used, because EchoStar’s proposed standard disregards “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.” Id. at *7. Thus, parties could destroy documents with impunity from the time they anticipate litigation until notice of a specific claim. Also, the Zubulake standard has been adopted by numerous courts throughout the country, and incorporated into the Sedona Conference’s guidelines for legal holds. The Sedona Conference, Commentary on Legal Holds: The Trigger and The Process, 11 Sedona Conf. J. 265, 269 (Fall 2010).

Second, regarding spoliation sanctions, it ruled:

[a] party . . . must demonstrate: (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 . . . Failures which support a finding of gross negligence . . . 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 email.

Voom, 2012 N.Y. Slip Op at *8 (internal citations omitted).

In addition, gross negligence creates a rebuttable presumption of relevance. Id. at *9.

Applying these standards, the First Department ruled that the motion court was correct in finding EchoStar grossly negligent in failing to preserve evidence after June 20, 2007, and that the evidence destroyed was relevant. It therefore found that an adverse-inference charge was appropriate.

In conclusion, a party must implement a litigation hold when it “reasonably anticipates litigation,” which is defined as when that party is “on notice of a credible probability that it will become involved in litigation.” It should be added that the Zubulake standard was adopted as a matter of federal common law, and is not part of the Federal Rules of Civil Procedure. Currently, the federal Advisory Committee on Civil Rules is considering a proposal to formally enact a preservation-and-spoliation sanctions rule.

Keywords: litigation, pretrial practice and discovery, e-discovery, ESI, Zubulake, EchoStar, Voom

Yitzchak M. Fogel is with White & Case in New York, New York.

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