Appellate Division Embraces Federal ESI Standards

New York Law Journal

In two decisions issued, respectively, at the end of January and February, New York’s Appellate Division, First Department, in effect, “federalized” the scope of a party’s duties in the electronic discovery context—duties to preserve electronically stored information (ESI), to suspend routine document retention/destruction practices, to collect and produce electronic documents, records and data in a litigant’s possession, custody or control, and to incur the costs of doing so, subject to the potential of later court intervention when those costs prove to be excessive or oppressive. On Jan. 31 the court issued its decision in Voom HD Holdings LLC v. EchoStar Satellite LLC,¹  holding that major aspects of electronic discovery practice set out in two federal district court decisions—one called Zubulake,² and the other called Pension Committee ³— should provide the preservation and disclosure standards in New York state courts.

On Feb. 28, the appellate court issued its decision in U.S. Bank N.A. v. GreenPoint Mtge. Funding Inc.,⁴ determining which party, the requester or the producer, should incur the cost of searching for, retrieving and producing ESI requested in the discovery process. Consistent with the court’s adoption in Voom of the Zubulake standards for handling ESI preservation and disclosure, the First Department in U.S. Bank decided that Zubulake also “should be the rule in this Department,” requiring the producing party to bear the costs of ESI production, subject to possible relief, in the court’s discretion, following a “proper motion by the producing party.”

Is this a big new deal for state court practitioners? You bet! At least in some respects. The Zubulake ESI standards are “old hat” for federal court mavens but, for those whose “home” turf is the state courts and whose practice Bible is the CPLR, getting up to speed on the federal approach to ESI handling is required. It is not all that easy. Complexities abound. Although electronic discovery challenges are familiar fare to some in the New York Commercial Divisions, which handle large, complex cases, that’s only a fraction of the caseload affected. And now that Voom and U.S. Bank have made it “official,” even practice in the Commercial Divisions may need some adjustments.

Further, readers should note that, in U.S. Bank, the court referred to the “Rules of the Commercial Division for Supreme Court, Nassau County,” as “the most sophisticated rules concerning discovery, including ESI, in the state.”⁵ Those ESI Guidelines, in turn, “substantially rely” on a “Suggested Protocol for Discovery of ESI” developed by Chief Magistrate Judge Paul W. Grimm of the U.S. District Court for the District of Maryland in collaboration with members of the bar of that court and technical consultants.⁶ Infusion of federal practices comes at a time when modifications to federal ESI rules and practices are being considered by a federal civil rules advisory committee seeking to curtail excesses and costs and to promote efficiencies in discovery.⁷

Readers need to acquaint themselves with the Zubulake and Pension Committee decisions, both authored by Southern District of New York, U.S. District Court Judge Shira A. Scheindlin, one of the country’s foremost experts on electronic discovery. Judge Scheindlin, teaming with Fordham Law School Professor Daniel J. Capra and The Sedona Conference, has issued a helpful casebook titled, “Electronic Discovery and Digital Evidence: Cases and Materials” (West 2009), a text cited in Voom.

The Pension Committee decision carried the title, “‘Zubulake’ Revisited: Six Years Later,” so both federal decisions are must reading. This writer’s column in February 2010, “E-Discovery Requirements Clarified in New Decision,”⁸  elaborated on the Pension Committee opinion. Much of the article is in simplified “Question” and “Answer” format. Further, since the First Department in U.S. Bank mentioned the Nassau County Commercial Division’s Guidelines for Discovery of ESI, readers should consider that work product as well.

Records Deleted

Now, let’s zoom in on Voom. Plaintiff (P) and defendant (D) entered into a 15-year contract in November 2005 by which D would distribute P’s television programming. Things didn’t work out. P contends that D determined in mid-2007 that the deal was disadvantageous and that D decided to falsely claim that P failed to meet its obligations. A series of meetings and letters between the parties in 2007-2008 ensued.

D formally terminated the agreement on Jan. 30, 2008, and P filed suit the next day. D, however, did not implement a “litigation hold” until after P filed suit. As a result, D’s e-mails were deleted. Only on June 1, 2008—four months after P commenced suit and nearly one year after D was on notice of anticipated litigation—did D suspend the automatic deletion of relevant e-mails. Some of the deleted e-mails were produced only because they were captured as “snapshots” of executives’ e-mail accounts taken in connection with other litigations.

P moved for spoliation-of-evidence sanctions. It argued that D should have reasonably anticipated litigation prior to P’s commencement of this lawsuit. The motion court, citing Zubulake, concluded that D should have reasonably anticipated litigation no later than June 20, 2007, the date D’s counsel sent to P a letter containing D’s notice of breach, a demand and a reservation of rights. Then, the court found that D took no steps to halt the purging of e-mails during the four-month period after the complaint was filed, leaving it to non-attorney employees to determine which documents were relevant in response to litigation. Accordingly, the motion court concluded that D destroyed relevant documents that should have been preserved.

D had previously been sanctioned for substandard document practices in another federal court litigation, yet continued those same practices. The motion court in Voom determined that D’s conduct, at a minimum, constituted gross negligence. Therefore, a negative or adverse inference against D at trial was considered an appropriate sanction. The Appellate Division agreed and affirmed the motion court’s decision. Formally adopting the standards for preservation, disclosure and sanctions set forth in Zubulake and Pension Committee, the First Department said the Zubulake standard was “harmonious” with New York precedent in the traditional discovery context and provides litigants with sufficient certainty as to the nature of their electronic discovery obligations and when such obligations are triggered.

The following are some of the major points made by the appellate court. Once a party “reasonably anticipates litigation,” it must suspend routine document retention/destruction policy and put in place a “litigation hold” to “ensure the preservation of relevant documents.” The duty to preserve and issue a hold can fall upon a party even before litigation is filed. A party facing litigation “must take active steps to halt” the purge process. An “appropriate” litigation hold preventing the routine discovery of electronic data is a “minimum.”

The “best practice” is for the hold to be in writing. In footnote 2, however, the court observed that there might be circumstances (e.g., a small company with only a few employees) where an oral hold “would suffice.” The hold “must direct appropriate employees” to preserve all relevant records, “electronic or otherwise.” It “must 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. In its footnote 3 the court observed that ESI “may exist on employees’ home computers, on flash drives or Blackberr[y]s, in a cloud computing infrastructure or off-site on a remote server or back-up tapes.”

Sanctions Appropriate

The litigation hold should direct that routine destruction policies “such as auto-delete functions and rewriting over e-mails cease” and should describe the consequences for failure to preserve ESI. Where a party is a large company, it is “insufficient” in implementing the litigation hold to vest total discretion in the employee to search and select what the employee deems relevant “without the guidance and supervision of counsel.”

Quoting from the Sedona Conference Guidelines, the court said that “[A] reasonable anticipation of litigation arises when an organization is on notice of a credible probability that it will become involved in litigation, seriously contemplates initiating litigation, or when it takes specific actions to commence litigation.”⁹ In Voom, the First Department said D should have reasonably anticipated litigation as of June 20, 2007, the date it sent P a letter demanding an audit and threatening termination of the contract.

Spoliation sanctions here were appropriate. Under Zubulake, the showing required is: (1) the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a “culpable state of mind”; and (3) 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 the claim or defense. In evaluating a party’s “state of mind,” failures supporting a finding of “gross negligence” include: failure to issue a written litigation hold, when appropriate; failure to identify “all of the key players” and to ensure that their electronic and other records are preserved; and the failure to cease deletion e-mails.¹⁰

When the destruction of evidence is intentional or willful, “relevance” is presumed. So, too, with destruction resulting from gross negligence. Merely negligent destruction, however, requires proof by the party seeking spoliation sanctions that the destroyed evidence was relevant. A presumption of relevance is rebuttable. The alleged spoliator could show, for example, that the innocent party had access to the evidence or that the ESI would not support that party’s claims or defenses. If the spoliator shows no prejudice was suffered then the adverse inference instruction will not be given, though a lesser sanction may still be required. In Voom, D acted in bad faith or with gross negligence. Hence, the adverse inference sanction was appropriate.

In its U.S. Bank decision, the Appellate Division focused on the issue of “which party is to incur the cost of searching for, retrieving and producing” both ESI and physical documents. Again the court decided that Zubulake “should be the rule in this Department, requiring the producing party to bear the cost of production.” The IAS court can modify this rule in the exercise of its discretion “on a proper motion by the producing party.” Plaintiff U.S. Bank sued defendant GreenPoint over mortgage loan transactions. Plaintiff served a request for documents. Defendant moved for a protective order tendering a proposed discovery protocol, asking for plaintiff to pay for costs of the search as well as defendant’s pre-production attorney review time in asserting privilege and confidentiality. The court denied approval of the discovery protocol and denied defendant’s request to be compensated for the privilege review by attorneys. However, the court did hold that the party seeking discovery bears the costs incurred in its production.

On appeal, the First Department disagreed. Following the lead of Zubulake, the cost of search, retrieval and production of ESI, at least initially, is on the producing party. Should circumstances warrant, the federal rules permit the shifting of costs between the parties. New York courts have discretion to do the same under article 31 of the CPLR.

Seven factors set forth in Zubulake bear upon that inquiry: “(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.”¹¹  Motion courts should not follow these factors as a “checklist” but, rather, as a guide to the exercise of discretion in determining whether the document request is an “undue burden or expense” on the responding party.

Defendant’s motion here was premature. The “more prudent course of action” was for defendant to first move to limit or strike the discovery requests that defendant found overbroad, irrelevant or unduly burdensome. Following resolution of that motion, if defendant still believes the costs associated with search, retrieval and production of ESI are prohibitive, defendant could then file a motion for the costs to be shifted to plaintiff. Here, however, because there was no evidence in the record supporting the fee structure proposed by defendant, the matter was remanded for further proceedings.

Conclusion

The slow infusion into state court practice of federal standards regarding the handling of ESI has been hastened with the Appellate Division’s decisions in Voom and U.S. Bank. This step likely will bring with it a slew of attendant problems, many of which have vexed federal courts for years and some of which the federal rules advisory committee is analyzing for possible rules changes. Further, because state court caseloads and institutional frameworks are different, a period of adjustment likely will be necessary. A big problem may surface regarding ESI discovery from non-parties where production costs may be high and personnel to do searches may be scant. One thing is clear, however. Practitioners not now familiar with the federal ESI discovery standards need to learn them, sooner rather than later.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

1.  2012 NY Slip Op 00658 (1st Dept. Jan. 31, 2012).
2.  Zubulake v. UBS Warburg LLC, 220 FRD 212 (S.D.N.Y. 2003).
3.  685 F.Supp.2d 456, 473 (S.D.N.Y. 2010).
4.  2012 NY Slip Op 01515 (App. Div., 1st Dept. Feb. 28, 2012).
5.  U.S. Bank, 2012 NY Slip Op 01515, at p. 5 (referring to Commercial Division, Nassau County, Guidelines for Discovery of Electronically Stored Information (ESI)).
6.  A copy of that Suggested Protocol for Discovery of ESI can be found at www.mdd.uscourts.gov/news/news/ESIProtocol.pdf.
7.  The Civil Rules Advisory Committee met in April 2011 at the University of Texas Law School in Austin. The committee decided to schedule a mini-conference on “preservation” and “spoliation” issues in September 2011. See T.Y. Allman, Rulemaking: the September 2011 Mini-Conference of the Civil Rules Subcommittee, 79 U.S.L.W. 2457, 2011 WL1643848 (May 3, 2011).
8.  Hoenig, New York Law Journal, Feb. 17, 2010, p. 3.
9.  “The Sedona Conference Commentary on Legal Holds: The Trigger and the Process,” 11 Sedona Conf. J. 265, 269 (Fall 2010).
10.  Voom, 2012 NY Slip Op 00658, at p. 11 (citing Pension Committee, 685 F.Supp.2d at 471).
11.  U.S. Bank, Slip Op at p. 6 (quoting Zubulake, 217 F.R.D. at 322).