AJ Holdings Grp. LLC v. IP Holdings, LLC, No. 600530/2009 (N.Y. Sup. Ct. Sept. 19, 2014).

In this case involving the breach of a licensing agreement, the defendants sought spoliation sanctions including striking the complaint, dismissal, adverse inference, and attorneys’ fees.

The defendants filed a motion to compel the plaintiff to produce both paper and electronic discovery. In granting the motion, the court ruled that the plaintiff’s duty to preserve arose on September 29, 2008, the date its counsel sent the defendants an e-mail regarding the early termination of the license agreement. The court’s ruling also allowed the defendants’ forensic expert to examine the plaintiff’s computers and devices to determine whether any information deleted after the duty to preserve arose could be recovered. Because it was unclear whether any data had been lost, the court found the defendants’ request for spoliation sanctions premature but granted them the right to renew their request after the forensic examination.

The defendants’ expert found that the plaintiff did not institute a legal hold or take steps to collect or preserve e-mail on its e-mail servers. Indeed, the plaintiff’s IT manager testified that he was unaware of the lawsuit until the day before his deposition and that no one informed him that e-mail needed to be preserved. Therefore, all but a “handful” of e-mails sent between the time the duty to preserve arose and the filing of the lawsuit had been lost. Comparing that handful to the typical volume of e-mails sent by the custodians, the expert concluded that “a substantial number of mail items” had been destroyed. This problem was exacerbated by the plaintiff’s replacement of the computers and Blackberrys its principals used during the relevant time frame, so the expert could not examine them. Further, the plaintiff’s employees used AOL accounts to exchange work-related e-mails, and without access to the hardware, the expert could not access any deleted messages.

After the forensic examination, the defendants asked again for spoliation sanctions, and the court granted their motion. Under the seminal case Zubulake v. UBS Warburg, the company should have preserved the e-mail of “key players” likely to have information relevant to the dispute. The five principals at issue had participated in the termination of the license agreement and “had control over relevant email.” Therefore, they had a duty to preserve evidence.

Despite this duty, the key players took no steps to preserve evidence: they did not institute a legal hold or prevent the automatic deletion of their e-mails from the servers, although their counsel had repeatedly warned them to do so. The principals “discussed” an oral legal hold but never implemented it. Thus, the court found the principals were grossly negligent in the dereliction of their duty to preserve evidence. Because the destruction of the evidence was grossly negligent, the relevance of the evidence was presumed. The court found that even if the spoliation had been merely negligent, the destroyed e-mail would have been relevant to the defense of the action.

The court declined to strike the plaintiff’s complaint but found an adverse inference appropriate at both summary judgment and trial because the lost evidence put the defendants “at an undue disadvantage in establishing their defense.” The court also ordered the plaintiff to cover the cost of the forensic examination and the defendants’ attorneys’ fees for both motions seeking sanctions.

 

Takeaways:

The facts underlying this discovery dispute should serve as a wake-up call for parties that have yet to formalize their preservation protocol.

First, the plaintiff “discussed” but never implemented an oral legal hold. Although some courts find oral legal holds acceptable depending on the facts of the case, others have viewed oral holds as inadequate and even bordering on recklessness. Before they face litigation, companies should establish a process for implementing a written, defensible legal hold.

In addition, the plaintiff’s failure to involve its IT manager in the preservation process was a serious misstep. Particularly when an organization has automatic deletion processes that affect aging e-mails and other electronic evidence, the IT team must be brought into the loop to halt these processes. IT staff can then track and preserve any electronic devices and other resources that might otherwise be subject to disposal or destruction.

 

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