Timing is everything when considering whether a “litigation hold” is needed to preserve documents for a future lawsuit. A recent decision upholding sanctions against a corporate party for destroying e-mails while in the midst of a contractual dispute reconfirms an old eDiscovery lesson: sometimes a duty to preserve can attach before a lawsuit has been filed.

The January 31 decision in Voom HD Holdings LLC v. EchoStar Satellite L.L.C. by the New York Appellate Division will likely attract the attention of many national companies that may at times have threatened to terminate a contract when in the midst of negotiating a contractual dispute without ever thinking that the threat might give rise to a preservation obligation.

The underlying dispute  between EchoStar and Voom HD erupted in June 2007 when counsel for EchoStar wrote to Voom complaining of an alleged breach and threatening to terminate the parties’ contract. After about six months of contentious letter writing, EchoStar terminated the contract, and Voom filed suit the next day.

But despite months of posturing about litigation, EchoStar did not put a litigation hold in place until four days after the lawsuit was filed. Equally as problematic, the litigation hold initially failed to mandate the suspension of the company’s e-mail auto-delete settings, and instead relied on individual employees to take steps to preserve e-mails.

After learning that EchoStar had destroyed potentially relevant e-mails, Voom moved for sanctions. The trial court cited the now familiar standard articulated by U.S. District Judge Shira A. Scheindlin in Zublake v. UBS Warbug LLC: “Once 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.”

In EchoStar’s case, the trial court said, the hold should have been put in place no later than June 20, 2007, when EchoStar sent a letter to Voom containing the notification of breach.

The court sanctioned EchoStar with an adverse inference, finding that the company had been negligent in destroying relevant evidence and had acted in bad faith—or was at least grossly negligent—because it had a history of electronic discovery spoliation, having previously been sanctioned for the very same electronic discovery practices in Broccoli v. EchoStar Communications Corp. (The court’s consideration of EchoStar’s prior history of sanctions is another aspect of the case that will likely garner notice from litigants and attorneys.)

On appeal, EchoStar argued that the New York state courts should not adopt the Zublake standard because it did not provide a clear definition of “reasonably anticipated.” Instead, EchoStar asserted, the appellate court should hold that a company must put in place a plan to preserve documents when it “has notice of a specific claim” or when litigation is actually pending.

The New York Appellate Division affirmed the lower court’s adoption of Zublake and rejected EchoStar’s arguments that the company did not have to issue a litigation hold until actual litigation ensued.

“To adopt a rule requiring actual litigation or notice of a specific claim ignores the reality of how business relationships disintegrate,” the appellate court said. “Sides to a business dispute may appear, on the surface, to be attempting to work things out, while preparing frantically for litigation behind the scenes. EchoStar and amicus’s approach would encourage parties who actually anticipate litigation, but do not yet have notice of a ‘specific claim’ to destroy their documents with impunity.”

Ultimately, the appellate court also agreed with the trial court that EchoStar should have reasonably anticipated litigation as of the June 20, 2007, letter threatening termination. Regarding EchoStar’s failure to issue a litigation hold during the parties’ negotiations, the court held that “[t]he destruction of e-mails during the critical time when the parties’ business relationship was unquestionably deteriorating reflects, at best, gross negligence. Further, the destruction of e-mails after litigation had been commenced, when EchoStar was unquestionably on notice of its duty to preserve, was grossly negligent, if not intentional.” 

The EchoStar case is a good reminder to corporate litigants of the critical importance of timing when issuing litigation holds. In the course of negotiating a contract dispute, corporate litigants often make threats about terminating the contract or initiating a lawsuit. It is important for companies to recognize that these threats can, in certain instances, give rise to a duty to preserve even before a lawsuit is filed. And when the company does issue a litigation hold, it is vitally important that the hold accounts for documents subject to automatic deletion schedules. In this day and age, the deletion of e-mail after a duty to preserve has been triggered is a red flag that will immediately draw the court’s attention.

For more information about this case or guidelines for preserving e-mails and other electronically stored information (ESI), please contact Philip N. Yannella at 215.864.8180 or yannellap@ballardspahr.com.

Copyright © 2012 by Ballard Spahr LLP.
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