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Spoliation Of Evidence, Even If Done In The Normal Course Of Business, Is Sanctionable

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  • Posted on: Mar 8 2017

An important part of any litigation is documentary discovery. As any litigant can attest, especially in complex matters, documents form the foundation of discovery plans and strategies, and, more significantly, proof at trial. Consequently, litigants must collect and preserve their documents, particularly electronically stored information (“ESI”), from the moment they are aware of their involvement in a lawsuit, or when there is a reasonable anticipation that a lawsuit may be filed.

Given the importance of documents to a litigation, attorneys will typically send “litigation hold” letters to all custodians (e.g., their clients, opposing parties, or third parties) of documents and information, including ESI, to ensure that all steps are taken to preserve them for the litigation. These letters generally (a) identify the subject matter of the litigation and the documents and business records covered by it, (b) reinforce the duty to preserve, and (c) reinforce the ongoing duty to preserve until the lawsuit is resolved. Essentially, parties and non-parties are instructed that nothing should be deleted, removed, hidden, modified, or discarded by anyone while the litigation is pending.

When a person or company withholds, alters, hides, or destroys evidence relevant to the litigation, either intentionally or negligently, it is considered “spoliation” of evidence and can lead to sanctions against the party that is guilty of spoliation including, but not limited to, dismissal of the action, striking a pleading, assessing monetary penalties, or permitting the jury to take a negative inference against the spoliating party.  The negative inference at trial can be very damaging to a party because it permits the jury to infer that there was something to hide (e.g., the party had a “guilty conscience”) and the missing evidence is unavailable because it negatively impacted that party’s affirmative case or defense.

The Law In New York 

A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “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.” Voom HD Holdings LLC v. Echostar Satellite L.L.C., 93 A.D.3d 33, 45 (1st Dept. 2012) (quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003); Pegasus Aviation I, Inc. v. Varig Logistica S.A., 26 N.Y.3d 543, 547-48 (2015). Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed (see Zubulake, 220 F.R.D. at 220). On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.

The party requesting sanctions for spoliation has the burden of demonstrating that a litigant intentionally or negligently disposed of critical evidence, and fatally compromised the movant’s ability to prove a claim or defense. Utica Mut. Ins. Co. v. Berkoski Oil Co., 58 A.D.3d 717, 718 (2d Dept. 2009) (citation and quotation marks omitted); Mendez v. La Guacatala, Inc., 95 A.D.3d 1084, 1085 (2d Dept. 2012).

Under certain circumstances, the failure of a party to institute a litigation hold or to implement any uniform or centralized plan to preserve data or even the various devices used by the key players in the transaction might demonstrate gross negligence, which would gave rise to a rebuttable presumption that the spoliated documents were relevant. E.g., VOOM HD Holdings, 93 A.D.3d at 45; AJ Holdings Group, LLC v. IP Holdings, LLC, 129 A.D.3d 504, 505 (1st Dept. 2015).  Sanctions for discarding items in good faith and pursuant to a company’s normal business practices are inappropriate in the absence of pending litigation or notice of a specific claim. See, e.g., Conderman v Rochester Gas & Elec. Corp., 262 AD2d 1068 (4th Dept. 1999); Gogos v. Modell’s Sporting Goods, Inc., 87 A.D.3d 248 (1st Dept. 2011)). However, where the party failing to preserve evidence is placed on notice of litigation within or before the time period when the requested evidence is subject to automatic destruction, a sanction will be appropriate. See Strong v. City of N.Y., 112 A.D.3d 15 (1st Dept. 2013).

Ferrara Bros. Bldg. Materials Corp. & Best Concrete Mix Corp. v. FMC Constr. LLC

In Ferrara Bros. Bldg. Materials Corp. & Best Concrete Mix Corp. v. FMC Constr. LLC, 2016 N.Y. Slip Op. 26362 (Sup. Ct. Queens Co. 2016), the Court assessed a discovery sanction against the defendant for the improper destruction of ESI during the pendency of the litigation.

Background

Ferrara Bros. involved a claim by the plaintiff, Ferrara Bros. Bldg. Materials Corp. & Best Concrete Mix Corp. (“Ferrara”), that the defendant, Casa Redimix Concrete Corp. (“Casa”), interfered with its contract with the defendant FMC Construction LLC (“Construction”) to provide cement for a construction project, thereby causing it to lose prospective profits from the job. Casa claimed that it did not know of the existence of the contract between Ferrara and Construction. Ferrara alleged that Casa purposely backdated its contract with Construction to give the impression that it was entered into prior to Ferrara’s contract rather than after Casa’s principals became aware of Ferrara’s contract. Ferrara claimed that electronic data, such as metadata, would reveal the true generation dates and revision histories of the documents.

Ferrara sought ESI from the defendants, specifically metadata that would reveal the dates on which the defendants prepared, modified, and executed their contract.  In response to the request, Casa provided an affidavit from an information technology specialist, who claimed that two years after the case was commenced, the computers on which the native information was stored had been replaced and discarded to update Casa’s computer system. Significantly, the update was not done through an automatic process.

Ferrara moved for sanctions against Casa for the spoliation of evidence. Because there was no issue that the computer system was destroyed during the pendency of the lawsuit, the only issues before the Court were “whether Casa knew or should have known that the computers would have evidence relevant to the case, whether the plaintiff’s delay waived its right to demand the subject electronically stored information, and what sanction, if any, [was] an appropriate exercise of the Court’s jurisdiction.”

The Court’s Ruling

As an initial matter, the Court rejected Casa’s argument that Ferrara waived its right to request the ESI (i.e., the metadata) due to the passage of time, noting that there was no case authority “that stands for the proposition that a party may discard relevant evidence during the pendency of a litigation if opposing counsel waited until years later in the lawsuit to request it.”

Having disposed of the waiver argument, the Court addressed whether the requested ESI was relevant to Ferrara’s claim and whether Casa wrongfully destroyed it. As to the former inquiry, the Court determined that the requested ESI (i.e., the metadata showing “the date and time of creation” of the contract) were “relevant to the case at bar” and that Casa failed to rebut the presumption of relevance. In fact, Casa failed to rebut the presumption that it “was negligent, even grossly negligent, in failing to suspend its destruction of the computer system on which the contract in question was generated.” Thus, as to the latter, the Court found that, considering the parties were in litigation at the time of the request, Casa “knew or should have known, even absent a specific demand by the plaintiff, that the creation and modification of the contract, via the defendant’s computer system, would bear upon the parties’ dispute.” Given such knowledge, Casa had an obligation to preserve the ESI and its failure to do so subjected it to sanctions.

Noting that the “the lynchpin for spoliation sanctions under New York law, is prejudice” (citation omitted), the Court found that, although Ferrara was prejudiced by the destruction of the system and the consequent inability “to include a forensic analysis of the metadata, to demonstrate … that the … contract was created at a time when [Casa] had notice of [Ferrara’s] contract with” Construction, it could still present testimonial evidence. As a result, the Court sanctioned Casa by assessing “a negative inference at trial, … to strike [the] balance between the need to ameliorate any prejudice related from the destruction of the computer system, and the absence of demonstrable wilfulness on the defendants’ part.”

Takeaway

The importance of preserving evidence at the outset of litigation, or in anticipation of litigation, cannot be underscored enough.  While Casa may have needed the computer system upgrade, a litigation hold and periodic reminders of the requirement to preserve evidence would have put it on notice that such an upgrade would expose it to discovery sanction. As Ferrara shows, courts will impose a duty on litigants to have litigation holds in place to ensure that all relevant evidence is preserved, and that the failure to do so can result in sanctions.

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