E-Discovery Sanctions In New York Supreme Court: Einstein v. 357 LLC

Tuesday, January 5, 2010 - 00:00

Introduction

Over the past few years, courts in various jurisdictions have imposed sanctions for a party's failure to fulfill preservation or production obligations relating to electronically stored information ("ESI"). Recently, in a case pending in the Commercial Division of the New York Supreme Court, County of New York, Justice Charles E. Ramos issued a decision imposing severe sanctions upon a party for its failure to implement litigation hold procedures and take steps to preserve electronic mail that was prone to deletion. The decision in Einstein v. 357 LLC ,604199/07 (October 21, 2009), one of only a few New York Supreme Court decisions in the e-discovery field, suggests that both adversaries and the New York state courts are becoming increasingly attuned to the obligations that arise at the onset of anticipated litigation and throughout the discovery process.

Discovery Motions

In the Einstein case, plaintiffs claimed that a Brooklyn condominium unit that they purchased was defective in its design and construction, and that defendants, including a real estate brokerage and several of its agents (the "broker"), fraudulently concealed water leakage defects and induced plaintiffs to purchase the apartment.

During discovery, the broker was asked to produce electronic mail relevant to the condominium. When plaintiffs noticed that emails they had received from the broker's co-defendants were not included in the broker's document production, they brought a motion to compel. In response, the broker represented that it had in good faith produced all the responsive documents it could locate. However, based on the apparent non-production of known relevant emails, the Court ordered a neutral vendor to perform a forensic search of two hard drives identified by the broker as containing potentially relevant data that had not been produced. When that search failed to turn up the expected emails or any additional relevant documents, the broker was asked to provide an explanation for why emails that should have been in its production were missing.

A Late Revelation

At a subsequent hearing, held seven months after plaintiffs' initial motion and almost a year after plaintiffs' document demand initially was served, the broker revealed for the first time that "emails were missing as a result of the normal individual email mailbox cleanup performed by individual agents in order for new emails to be sent and received due to the email mailbox size limit." Decision at p. 8. The broker's Director of Information Technology ("IT Director") testified that the company had a policy allocating 200 megabytes of email space to each broker, and once an agent reached that limit, that agent could not send or receive email until existing emails were manually deleted.

The Absence Of Preservation Efforts

The broker's IT Director also testified about the absence of efforts to preserve relevant data. "[H]e never had any conversation with the [brokers] regarding how they send or receive emails. . . . He also admitted that at no time during his document retention activities did he ever advise anyone of the manual deletion policy controlled and implemented by the individual brokers; similarly, he did not ever tell anyone that there existed the possibility that relevant emails were being deleted, nor did anyone ever tell him to check to make sure that nothing was deleted." Decision at p. 11. "Most egregiously, [the IT Director] never advised anyone that in the ordinary course of business, individual users not only may, but must, delete emails from their inbox as the inbox capacity reaches its 200 megabyte capacity." Moreover, the testimony "incredibly demonstrates that when litigation commences, the broker's IT department takes no steps to prevent users, even those named as parties to such litigation, from deleting potentially relevant emails." Decision at p. 15.

Factual Findings And ConclusionsOf Law

The Court found that the IT Director's affidavits submitted in connection with the prior motions "were materially incomplete, particularly with respect to the [broker's] email deletion policy." While the Court found that the IT Director bore responsibility for the failure to communicate with anyone about the deletion policy, "counsel for the [broker was] is also to blame for failing to investigate." Also, because no internal emails among the agents were produced, and certain reply emails were known to be missing, the Court concluded that the deletion of emails was "selective."

Justice Ramos noted that "[t]he [Civil Practice Laws and Rules] and New York case law are silent on the obligations of parties and their counsel to effectuate a 'litigation hold,'" but then cited federal cases from the Southern District of New York for the proposition that "the utter failure to establish any form of litigation hold at the outset of litigation is grossly negligent." Decision at p. 21. The Court explained that "[w]hile the deletion of emails is not per se improper, particularly when such deletions occur in the ordinary course of business, the matter is quite different when litigation has commenced or is reasonably anticipated. At that point, a party must take additional steps to preserve potentially relevant emails." Id.

Finding that the broker had made no effort to stop its deletion policy or make a preservation copy of relevant email, and that the broker and its attorneys "failed to investigate the basic mechanics" of the email system, the Court determined that sanctions were appropriate. Decision at p. 23. "[T]he failure to implement any litigation hold, not only after commencement of litigation, but also after this Court's repeated warnings that counsel should 'read [their] clients the riot act,' was grossly negligent and rises to the level of 'culpable conduct' required for a finding of spoliation." Decision at p. 25.

Sanctions

As a basis for imposing sanctions, the Court found that the broker willfully and unnecessarily caused extensive motion practice and delay without reasonable justification, and thwarted the implementation of a preservation solution by failing to disclose the nature of the email system at an earlier stage. Moreover, "the utter failure to implement a litigation hold constitutes a separate discovery violation warranting sanctions." Decision at p. 29.

In its motion, plaintiffs requested both monetary sanctions and the striking of the broker's answer. Justice Ramos acknowledged that "striking a pleading is appropriate if the movant makes a clear showing that the failure to comply with discovery obligations is willful, contumacious, or in bad faith." Decision at p. 27. However, in lieu of striking the answer, the Court issued a finding that the broker was "deemed to have known of the water infiltration problem and to have willfully misled Plaintiffs by concealing that condition from them during the sales process." Decision at p. 31. Thus, the core liability question in the litigation appears to have been decided as a matter of fact by virtue of a motion for sanctions. The Court also awarded fees and costs incurred in connection with the discovery motions and the fruitless review of the hard drives.

Conclusion

Although the fact pattern described in Einstein is unique, this decision serves as a reminder that both state and federal courts are increasingly aware of, and vigilant about, parties' obligations concerning the preservation and production of ESI. Clients and their counsel should conduct an early good-faith investigation into the relevant data systems' structure and records retention policies to determine whether any relevant ESI is in danger of deletion. If so, measures should be taken to suspend deletion policies, back up the data, and instruct relevant employees about the need to preserve data.

Moreover, although the facts in Einstein go beyond the mere failure to take prompt action at the outset of a litigation, Justice Ramos indicated that "the utter failure to establish any form of litigation hold at the outset of litigation is grossly negligent." Thus, it may be anticipated that adversaries and the state courts will begin to examine more closely a party's early preservation efforts, even in cases where alleged discovery failures are less evident. The Einstein decision is also notable for its frequent citation to, and adoption of, preservation standards found in federal case law from the Second Circuit.

Finally, it bears noting that a large portion of the Einstein opinion is based upon the actions and testimony of the defendant's IT Director. This highlights the need for IT personnel and counsel to actively coordinate each litigation hold exercise and to jointly investigate the facts that may be relevant to a good-faith fulfillment of preservation obligations. IT personnel may find themselves increasingly in the spotlight, submitting affidavits or even testifying on the witness stand when preservation issues arise.

Norman C. Simon is a litigation partner with Kramer Levin Naftalis & Frankel LLP. As part of his varied commercial practice, Mr. Simon has garnered significant experience in the area of e-discovery and chairs the firm's e-Discovery &Trial Support Committee. Brendan M.Schulman , an associate, is Kramer Levin's e-Discovery Attorney. In addition to his work on a wide range of commercial litigation matters, he advises clients on all aspects of electronic document retention, preservation, collection, review and production.

Please email the authors at nsimon@kramerlevin.com or bschulman@kramerlevin.com with questions about this article.