New York State Appellate Division, First Department, Adopts Federal Zubulake Standards for E-Discovery Preservation Obligations, Cost Allocation, and Spoliation Sanctions
Introduction
After years of scant guidance from the New York State Supreme Court Appellate Division on litigants’ electronic discovery obligations, a series of three First Department opinions has brought far greater clarity to the topics of preservation obligations, production cost allocation, and spoliation sanctions. All three opinions, unanimously rendered, adopted the standards set forth in the influential line of federal cases issued by Southern District of New York Judge Shira A. Scheindlin: Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). The adoption of the Zubulake standards on these three important e-discovery issues has delivered to litigants adjudicating in the New York State courts clearer guidance on how to properly conduct various aspects of the e-discovery process.
Three Landmark Decisions
The first decision, Ahroner v. Israel Discount Bank of New York, 79 A.D.3d 481, 913 N.Y.S.2d 181 (1st Dep’t 2010) (“Ahroner II”), adopted the three-part analysis set forth in Zubulake for determining when sanctions may be appropriate, and in what form, for the spoliation of electronically stored information (“ESI”). The First Department, applying the Zubulake standard, upheld the trial court’s determination that the defendants had destroyed hard drives and other relevant evidence either intentionally or as a result of gross negligence, warranting an adverse inference instruction. 79 A.D.3d at 482-83. While the lower court in Ahroner also had adopted the Zubulake standard dictating when preservation obligations commence, i.e., when litigation is reasonably anticipated, see 2009 NY slip op. 31526[U], at *18 (Sup. Ct. N.Y. Cty. July 9, 2009) (Madden, J.) (Trial Order) (“Ahroner I”), the First Department did not address that issue in Ahroner II
A little over a year later, however, in VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., _ N.Y.S.2d _, 2012 WL 265833, at *6 (1st Dep’t Jan. 31, 2012) (“VOOM”), the First Department tackled the issue head-on, and again — in a unanimous decision — adopted the “reasonable anticipation of litigation” standard for the onset of preservation obligations, as set forth in Zubulake.
Then, less than a month later, another unanimous panel adopted the Zubulake standards for cost allocation, specifically that costs should be borne by the producing party in the first instance, and, in dicta, suggested that the Zubulake analysis for cost-shifting could be appropriately considered later in the litigation. See U.S. Bank Nat’l Ass’n v. GreenPoint Mortg. Funding, Inc., _ N.Y.S.2d _, 2012 WL 612361 (1st Dep’t Feb. 28, 2012) (“U.S. Bank”). These three decisions have brought far greater clarity to e-discovery practice in the First Department than previously existed and allow for the application of the more developed federal body of case law on these subjects. Together, these three cases signal the First Department’s embrace of the Zubulake e-discovery standards.
The First Department Adopts Zubulake Standard for Spoliation Sanctions: Ahroner
As set forth in the trial court’s decision, the plaintiff’s allegations in Ahroner included employment discrimination based on age, race, and national origin, failure to pay overtime pursuant to the New York State Labor Law, and wrongful termination. Ahroner I at **2-3. On November 18, 2002, ten days after Ahroner’s termination, his counsel wrote to counsel for defendant Israel Discount Bank of New York (the “Bank”), advising the Bank of an ongoing investigation of claims of wrongful termination and employment discrimination. Id. at *4. The letter stated that the Bank was “on notice that [it] must undertake all efforts to preserve from spoliation all documents and other records relating to [Ahroner’s] employment, as well as any unlawful conduct of [the Bank] or its employees.” Id. An action subsequently was commenced on July 11, 2003, approximately eight months later. Id. Discovery ensued, described by the trial court as “extensive and arduous,” including the appointment of a special referee and a judicial hearing officer. Id. Plaintiff’s second document demand, dated January 4, 2004, sought all emails relating to Ahroner, and, by interim discovery order dated September 29, 2004, the court directed the Bank to produce “all emails relating to Ahroner’s discharge.” Id. at **5-6. The Bank produced no emails in response to this request, alleging that it had been unable to locate responsive documents beyond what it already had produced to plaintiff. Id. at *6. After a deposition in February 2007, in which plaintiff’s counsel learned that one of Ahroner’s supervisor’s computers was in the process of being upgraded, he immediately requested that the hard drive and server back-up tapes (where emails also were saved) be preserved. Id. at **6-7. The court expanded its interim discovery order on May 10, 2007 to include the production of all ESI regarding Ahroner and the preservation of the supervisor’s hard drive. Id. at *7. Defendants’ counsel agreed on the record to preserve and produce the evidence, but in subsequent correspondence to plaintiff’s counsel informed him that no “responsive electronically stored documents” had been found therein. Id.
On August 23, 2007, the court issued an order directing the Bank to produce the hard drive for inspection and examination by a forensic expert, which the court appointed after the parties failed to reach consensus. Id. at **7-8. On the day before the scheduled examination, defendant’s counsel informed plaintiff’s counsel by email that the hard drive would not be made available, that an image of the hard drive had been taken, all data was wiped, and the hard drive donated to charity. Id. at **8-9. Furthermore, the server back-up tapes had been only maintained for the Bank’s routine period of one year and were, too, no longer available. Id. at **9-10.
Ahroner moved for spoliation sanctions, in part, for the destruction of the hard drives and back-up tapes, arguing that upon receipt of the “notice of the potential action” by the November 2002 letter, “defendants’ counsel had an obligation to take custody of the back-up tapes and defendants’ hard drives, suspend their document retention policies, and preserve all relevant documents.” Id. at **10- 11. As a result, Ahroner sought sanctions in the form of an adverse inference instruction. Id. at *11. Defendants countered that the November 2002 letter and Ahroner’s complaint were insufficient to put them on notice of certain preservation obligations, but that, regardless, defendants had taken the necessary steps to fulfill their preservation obligations, and that plaintiff had failed to prove that any “purportedly destroyed evidence” would have been relevant to his claims. Id. at **11-12.
In deciding the motion, the trial court noted that CPLR 3126 allows that “if the court finds that a party destroyed evidence that ‘ought to have been disclosed…, the court may make such orders with regard to the failure or refusal as are just,’” including preclusion of evidence favorable to the spoliator or rendering a judgment on default against the offending party. Id. at **15-16 (citation and quotation marks omitted). Recognizing the “paucity of New York case law specifically addressing issues arising from the alleged destruction of electronic evidence,” and that “New York courts examining the issue have relied to some extent on precedent from federal courts,” the court turned to Zubulake and the three-part test set forth therein that a party seeking sanctions must establish. Id. at *17 (citing Zubulake, 220 F.R.D. at 220). Specifically, the party seeking sanctions must establish that:
(1) the party having 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 (3) that that destroyed evidence was ‘relevant’ to the parties’ claim or defense.
Id. at * 17 (quoting Zubulake, 220 F.R.D. at 220). The trial court further noted that, pursuant to Zubulake, the defendants’ preservation obligation arose when litigation was reasonably anticipated, and that preservation obligations do not end with the circulation of a litigation hold, but that counsel must “oversee compliance with the litigation hold, monitoring the party’s efforts to retain and produce relevant documents.” Id. at *18 (quoting Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 432 (S.D.N.Y. 2004)).
The trial court found the first two prongs satisfied and concluded that the destruction of the hard drive “was done in bad faith or at the very least was the product of gross negligence, so that the relevance of the email stored on the hard drive” could be “inferred.” Id. at **19-20. The court further stated that it was “deeply disturbed that despite the contradictory statements in the record regarding the preservation of the hard drive, defendants [made] no effort to explain these contradictions to inform the court as to what actually occurred. . . . [A]t best, no meaningful effort was made by the Bank to preserve the hard drive and, at worst, the Bank intentionally destroyed the hard drive to avoid disclosing its contents.” Id. at *21. Concluding that the three-part Zubulake test had been met, the court held that the record supported an adverse inference instruction. Id. at **21-22. Because Ahroner did not prove that the evidence was crucial to his case or that the loss was prejudicial, an adverse inference charge was held to be a more appropriate remedy than striking the defendants’ pleading. Id. at *22. The trial court also awarded the plaintiff reimbursement of fees paid to the forensic expert and attorney’s fees expended in pursuit of the hard drive’s examination. Id. at *24.
The First Department unanimously affirmed the decision, holding that “[s]poliation sanctions were properly granted” and adopting Zubulake’s three-pronged test as the appropriate framework to analyze a motion for sanctions. Ahroner II, 79 A.D. at 481-82. Finding the Zubulake test satisfied, the First Department further held that the delivery of an adverse inference instruction at trial that the “e-mails would not support defendants’ defense or contradict plaintiff’s claims” was the “proportionate” sanction. Id. at 483.
The First Department Adopts Zubulake Standard for Preservation Obligations: VOOM
A little over a year later, the First Department had occasion to provide instruction regarding the standard for the onset of e-discovery preservation obligations, an issue which presented itself in VOOM. Once again, the First Department, in a unanimous decision, followed the standards set forth in the federal Zubulake decisions, adopting as the triggering event for preservation obligation the “reasonable anticipation of litigation.” Kramer Levin previously issued an E-Discovery Alert on this decision on February 6, 2012, available athttp://www.kramerlevin.com.
As set out in the VOOM 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. 2012 WL 265833, at *1. 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. Id.
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 thus “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 *2. Subsequently, in July of that year, EchoStar sent VOOM additional letters, “claiming ‘material breaches.’” Id. This exchange of correspondence continued throughout July, September and October of 2007. 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, EchoStar executives exchanged emails “stating that EchoStar was proceeding with ‘the plan for a full termination.’” Id. at *3. 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 2007, VOOM had become “‘extremely concerned’ that the matter was going to be litigated and implemented a litigation hold, including automatically preserving emails.” Id. at *2. 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 *3.
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 emails; (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 “pre-set path of destruction” into a foldering-system; and (4) that EchoStar did not take “snap shots” of relevant email accounts until four days after the action began. Id. at **3-4.
The relevant federal Zubulake standard states 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 [and ESI].” Zubulake, 220 F.R.D. at 218. According to Zubulake, and its progeny Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010), 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 email auto-delete functions cease; and (e) describes the consequences for failure to preserve ESI. See Pension Comm., 685 F. Supp. 2d at 473-74.
The First Department in VOOM 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.” VOOM, 2012 WL 265833, at *6. 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 *3. 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 *4. “EchoStar’s argument would allow parties to freely shred documents and purge e-mails, simply by faking a willingness to engage in settlement negotiations.” 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. (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 emails were only produced by luck, because the emails were captured in “snap shots” of certain employees’ email accounts taken for the purpose of other litigations.
Given the finding that the obligation to preserve its ESI arose in June 2007, the point at which EchoStar could reasonably have anticipated litigation, coupled with the finding that its conduct was at best gross negligence, the First Department deemed the first two prongs of the three pronged Zubulake test (described above under Ahroner) satisfied. The First Department then turned to the third prong concerning the relevance of the destroyed evidence. VOOM, 2012 WL 265833, at *8. The “intentional or willful destruction of evidence is sufficient to presumerelevance, 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.” Id. (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. (quoting Pension Committee, 685 F. Supp. 2d at 468-69).
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. at *4. As such, it upheld the lower court’s ruling that an adverse inference against Echo Star at trial was an appropriate sanction. “An adverse inference was a reasonable sanction in light of Echo Star’s culpability and the prejudice to VOOM. The record shows that Echo Star acted in bad faith in destroying electronically stored evidence.” Id. at *8. An alternative remedy – striking Echo Star’s answer – was deemed inappropriate since other evidence remained available to VOOM to prove its claims. Id. at *10.
The First Department Adopts Zubulake Standard for Cost Allocation: U.S. Bank
Just weeks after issuing VOOM, the First Department handed down another unanimous decision, this time applying the Zubulake standard of allocating the costs “of searching for, retrieving and producing both [ESI] and physical documents that have been requested as part of the discovery process” to the producing party and declaring it the default rule for the First Department, unless specific considerations, in line with Zubulake’s cost-shifting analysis, warranted cost-shifting at a later point in the litigation. U.S. Bank, 2012 WL 612361, at **1, 5.
The litigation in U.S. Bank arose from the packaging and securitization of mortgage loans. Id. at *1. In the course of discovery, plaintiff U.S. Bank National Assoc. (“U.S. Bank”) served a request for production of documentson defendant GreenPoint Mortgage Funding, Inc. (“GreenPoint”), the originator of the mortgage loans at issue. Id. at *2. GreenPoint did not produce the documents; instead, it submitted a letter on April 28, 2009, to the court, pursuant to CPLR 3214(b) and 3103, seeking a ruling on various discovery issues, including whether production should be conditioned on U.S. Bank’s payment of the costs of production. See id. Subsequently, in December 2009 GreenPoint moved to stay discovery and sought an order that each party would pay for the discovery requests it made of the opposing party. See id. In opposition, U.S.
Bank argued that, based on the merits of its allegations, the relevance of its discovery requests, and the expected asymmetry between the parties’ discovery obligations, the court should deny GreenPoint’s motion. See id. The motion court, Judge Bernard J. Fried, denied GreenPoint’s request for a protective order, but in so doing, endorsed GreenPoint’s assertion that “the well-settled rule in New York State was that the party seeking discovery bears the costs incurred in its production.” Id. (internal citations and quotation marks omitted). The court did not extend this finding to the costs of attorney evaluation of evidence for responsiveness and privilege. Id. at *4. U.S. Bank sought clarification of the court’s order, and, at a conference, Judge Fried clarified and reiterated his holding, noting that the ruling did not preclude any party from making a subsequent application for re-allocation of discovery costs at a later date. See Id. at *2.
On appeal, the First Department reversed in part and remanded, adopting the Zubulake standard that “it is the producing party that is to bear the cost of searching for, retrieving, and producing documents, including electronically stored information.” Id. at *3 (emphasis supplied). In its decision, the court noted the unsettled nature of the question and the lack of guidance on the point from state statutes or rules but cited with approval the “movement among other courts” to generally adopt Zubulake as precedent in all contexts regarding discovery, as movement “in the proper direction.” Id. The court opined that Zubulake was consistent with the Federal Rules of Civil Procedure and other precedents, requiring the producing party to bear the initial cost of searching for, retrieving and producing ESI in discovery. Id. at *4.
The First Department found “unavailing” defendants’ arguments that requiring the requesting party to bear the discovery costs encouraged self-regulation in “the scope” of discovery demands and discouraged “parties from placing unnecessary and oppressive (even prohibitive) costs upon an opponent.” Id. The court further rejected the argument that the requestor-pays model “promotes judicial efficiency by removing the court from determining whether the information being sought is worth the cost of the search.” Id. Rather, the court held that the producer pays model favored “resolving disputes on their merits” and was “consistent with the long-standing rule in New York that the expenses incurred in connection with disclosure are to be paid by the respective producing parties.” Id. at **4-5. Moreover, the First Department noted that having the requesting party pay upfront for discovery costs “may ultimately deter the filing of potentially meritorious claims, particularly in circumstances where the requesting party is an individual,” Id. at *4 (citation omitted).
Although a cost-shifting analysis was not appropriate at that point in the litigation, the First Department called attention to the trial court’s discretionary ability to shift discovery costs between parties under certain circumstances and endorsed Zubulake’s seven factor cost-shifting analysis, which considers:
(1) [t]he extent to which the request is specifically tailored to discover relevant information; (2) [t]he availability of such information from other sources; (3) [t]he total cost of production, compared to the amount in controversy; (4) [t]he total cost of production, compared to the resources available to each party;(5) [t]he relative ability of each party to control costs and its incentive to do so; (6) [t]he importance of the issues at stake in the litigation; and, (7) [t]he relative benefits to the parties of obtaining the information.
Id. at *4 (citing Zubulake, 217 F.R.D. 309, 322 (S.D.N.Y. 2003)). The First Department advised that the motion court should follow these seven factors as “a guide to the exercise of their discretion in determining whether or not the request constitutes an undue burden or expense on the responding party.” Id. The court also indicated that expenses relating to production could be taxed by the successful party upon the conclusion of litigation – another method by which expenses might eventually be shifted to the requesting party. Id. at *5.
Conclusion
The combination of the Ahroner, VOOM, and U.S. Bank decisions certainly appears to cement the relevance and application of the Zubulake line of cases to e-discovery practice in state courts within the First Department. These decisions provide a measure of consistency as between the state and federal 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 – as to what preservation standards will apply, and which party will bear the eventual costs of production. Moreover, these decisions signal that state e-discovery standards may largely follow the trail blazed by New York federal court decisions over the last several years (e.g., Zubulake, Pension Committee and their many progeny), notwithstanding proposals by various bar associations and other constituencies in the past few years to implement differing standards. Keeping in mind the strict standards implemented in Zubulake and the possible ramifications for failure to abide by them (adverse inference instructions as in Ahroner and VOOM, or even dismissal), parties remain well-advised to implement timely and appropriate preservation procedures, and to circulate litigation holds (in accordance with best practices) as soon as practicable after litigation is reasonably foreseeable – a fact-specific determination for which consultation with counsel may be crucial. In light of the new guidance on costs, it is also prudent to consider the expense that may be incurred when planning a response to discovery requests.