New York Should Catch the Federal ESI Wave Before It's Too Late

Publication Source: New York Law Journal

It is now beyond question that electronically stored information (ESI) has dramatically changed the world of litigation for both parties and the courts. The federal courts have had a significant head-start over the New York state courts in developing detailed and intricate mandates for preserving and producing ESI and remedies for failing to follow those directives, with years of developing case law.

The issues have now finally made their way up to the New York Court of Appeals in the case of Pegasus Aviation I v. Varig Logistica, 2015 N.Y. Slip Op. 09187 (Dec. 15, 2015). New York's highest court was thereby given an opportunity to take a careful look at the issues and promulgate instructive and helpful rules for the lower courts grappling with these perplexing questions. Unfortunately, the Court of Appeals squandered the opportunity, and simply accepted the standards originated in the federal courts in New York that have been expressly superseded by the new Federal Rules of Civil Procedure (FRCP) and that are likely to cause further confusion and regrettable results.

Parties subject to New York State jurisdiction will now be placed in the untenable position of facing a different (and largely confusing) set of rules for ESI in cases in state court, while the federal procedures have been clarified and made more manageable.

FRCP Changes

Effective Dec. 1, 2015, the governing bodies of the federal court system implemented some of the most comprehensive and sweeping changes to the FRCP in many years. Among these changes is a new rule that specifically addresses ESI discovery sanctions. After many public comments (a total of 2,345), the Advisory Committee revamped its initial drafts and recommended the following amendment to FRCP 37(e), which is now applicable in the federal courts:

Rule 37. Failure to Make Disclosures or to Cooperate in Discovery? Sanctions

(e) Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice? or

(2) only upon finding that the party acted with the intent to deprive another party of the information's use in the litigation may:

(A) presume that the lost information was unfavorable to the party?

(B) instruct the jury that it may or must presume the information was unfavorable to the party? or

(C) dismiss the action or enter a default judgment.

Recognizing the overwhelming nationwide concern over the ESI tsunami sweeping over our court systems, the Federal Rules authorities sought to introduce more reasonable and uniform rules for ESI preservation and disclosures. As noted in the Rules Commentary to the 2015 Amendments: "Federal circuits have established significantly different standards for imposing sanctions or curative measures on parties who fail to preserve electronically stored information. These developments have caused litigants to expend excessive effort and money on preservation in order to avoid the risk of severe sanctions if a court finds they did not do enough."

The Advisory Committee further noted that there was a split in the federal circuits as to what type of failure to preserve ESI justified imposing significant sanctions, including adverse inference jury instructions. For example, the U.S. Court of Appeals for the Second Circuit ruled in Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002) that courts were authorized to impose such sanctions if the ESI was not adequately produced through "ordinary negligence" as well as gross negligence or willful conduct.

While the Second Circuit in DeGeorge added that the party seeking such a sanction must still prove that the "destroyed evidence" was "relevant" to the claims or defenses, "where a party seeking an adverse inference adduces evidence that its opponent destroyed potential evidence (or otherwise rendered it unavailable) in bad faith or through gross negligence (satisfying the 'culpable state of mind' factor), that same evidence of the opponent's state of mind will frequently also be sufficient to permit a jury to conclude that the missing evidence is favorable to the party (satisfying the 'relevance' factor)." Id. at 109 (footnote omitted).

The Second Circuit's standard was followed and elaborated upon by the federal district courts in New York. See, e.g., Zubulake v. UBS Warburg, 229 F.R.D. 422, 431 (S.D.N.Y. 2004) ("In this circuit, a 'culpable state of mind' for purposes of a spoliation inference includes ordinary negligence. When evidence is destroyed in bad faith (i.e., intentionally or willfully), that fact alone is sufficient to demonstrate relevance. By contrast, when the destruction is negligent, relevance must be proven by the party seeking the sanctions.") (footnotes omitted).

On the other hand, other circuits, like the U.S. Court of Appeals for the Tenth Circuit, required a showing of bad faith in order to impose more severe sanctions such as an adverse inference instruction. See, e.g., Turner v. Pub. Serv. Co. of Colorado, 563 F.3d 1136, 1149-50 (10th Cir.2009).

As indicated in the Commentary to the 2015 Amendments, new FRCP 37(e) expressly rejects the Second Circuit approach: "This subdivision authorizes courts to use specified and very severe measures to address or deter failures to preserve electronically stored information, but only on finding that the party that lost the information acted with the intent to deprive another party of the information's use in the litigation. It is designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse inference instructions on a finding of negligence or gross negligence."

The new approach of FRCP 37(e) has been warmly received by those who believe that far reaching discovery of ESI has caused unnecessary and avoidable expense and spawned unduly severe demands on counsel and their clients attempting to comply with the largely unforgiving ESI discovery rules imposed by certain courts (often using "20-20 hindsight").

State Courts' Developing Law

In the meantime, while the FRCP were in the process of being revamped, New York State courts started to follow and rely upon the strict Second Circuit approach, recognizing that sanctions can conceivably be imposed based upon the loss of ESI through ordinary negligence. See, e.g., Ahroner v. Israel Disc. Bank of New York, 79 A.D.3d 481, 482, 913 N.Y.S.2d 181,182 (1st Dept. 2010) and VOOM HD Holdings v. EchoStar Satellite, 93 A.D.3d 33, 45, 939 N.Y.S.2d 321, 330 (1st Dept. 2012), which followed decisions such as Zubulake, which in turn followed the Second Circuit's standard as announced in DeGeorge.

Then came the decision by the First Department in Pegasus Aviation I v. Varig Logistica, 118 A.D.3d 428, 987 N.Y.S.2d 350 (1st Dept. 2014, rev'd, 2015 N.Y.Slip.Op. 09187 (Dec. 15, 2015)), which is striking evidence that the new FRCP 37(e) is a more workable and practical guide to ESI sanctions. In Pegasus, in an unusual split of the Appellate Division, with one opinion concurring in part and dissenting in part, and another opinion dissenting, the First Department reversed the Supreme Court's order granting plaintiff's motion for an adverse inference instruction at trial against defendants as a sanction for spoliation of ESI. All justices agreed and endorsed the First Department's reliance upon VOOM and its incorporation of the Second Circuit's approach to imposing sanctions for lost ESI. The majority opinion and partial dissent agreed "that ordinary negligence may provide a basis for the imposition of spoliation sanctions." Pegasus, 118 A.D.3d at 435, 987 N.Y.S.2d at 356.

The majority opinion found that where "'the destruction of evidence is merely negligent, relevance [of the lost material] must be proven by the party seeking spoliation sanctions,'" citing VOOM, but ruled, contrary to the dissents, that plaintiff had not made such required showing. The partial dissent would have remanded the case to the court below to determine the extent to which plaintiff had been prejudiced by loss of the evidence and the sanction if any to be imposed. The other dissenting justice found that the trial court had properly determined that the defendants' conduct in failing to preserve the ESI amounted to "gross negligence" where the relevance of the missing data was presumed. Id. at 435, 987 N.Y.S.2d at 356.

On appeal to the Court of Appeals, the Pegasus case presented the high court with a golden opportunity to consider the wealth of prior federal decisions as well as the approach under new FRCP 37(e), as quoted above, and promulgate appropriate standards for preserving and producing ESI and the manner in which sanctions could be imposed. Unfortunately, the Court of Appeals simply accepted, without any analysis, the standards that the lower court had applied by adopting the now superseded federal decisions in New York. In fact, the Court of appeals started its decision in Pegasus with an unquestioned recitation of those standards:

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, 939 N.Y.S.2d 321 [1st Dept. 2012], quoting Zubulake v. UBS Warburg LLC, 220 F.R.D.212, 220 [SDNY 2003]). 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 (see id.).

Although all of the judges of the Court of Appeals chose to accept the above standards, similar to the First Department, they had difficulty and disagreed on how to apply those standards to the facts. The court split, 3-2, with the majority agreeing with the First Department's "ultimate conclusion that, at most, the [defendants'] failures [to preserve ESI] amounted to "a finding of simple negligence." Pegasus, 2015 N.Y.Slip.Op. 09187 (citation omitted). However, the Court of Appeals majority found that the First Department's majority erred "to the extent that it determined that [plaintiff] had not attempted to make a showing of relevance and chose to conduct its own analysis of the relevance issue without taking into account [plaintiff's] arguments in that regard." Id. (citation omitted). The court therefore remitted the matter to the trial court "for a determination as to whether the negligently destroyed ESI was relevant to [plaintiff's] claims against the [Defendants] and, if so, what sanction, if any, is warranted." Id.

The two dissenting judges found that the "evidence more closely comport[ed] with the trial court's finding that [defendants] were grossly negligent" and "inasmuch as the Appellate Division placed the burden on plaintiffs to demonstrate relevance when it should have placed the burden on [Defendants] to disprove it, [they] would [have] remit[ted] to that court for a determination of whether [Defendants] rebutted the presumption of relevance and, if not, for a discretionary determination of what sanction, if any, [was] warranted." Id.

Still Time to Catch the Wave

The differing, majority, concurring and dissenting opinions of both the Appellate Division and Court of Appeals in Pegasus reflect the courts' difficulty in determining when sanctions should be imposed under the former Second Circuit standards for ESI. Disagreement among the judges on questions as to whether the conduct amounts to "negligence," or "gross negligence," or whether the relevance of the missing ESI had been adequately established to impose significant sanctions where only "negligence" is found (and which party should have the burden on that issue), are illustrative of the unworkable nature of such standards. While new FRCP 37(e) is not a cure-all, it will certainly free the courts from grappling with these thorny issues, and the corresponding uncertain and unpredictable results.

So, is New York heading in the wrong direction by accepting standards that are against the national tide and that have been expressly superseded by the FRCP? Would this be a step backwards for the New York State Commercial Division, which has received abundant, well-deserved, praise for its sophisticated, specialized handling of business litigation?

Is there still time for the New York courts to recognize the enlightened new federal standard before they invest too heavily into the superseded federal standards? Or will we witness what happened when New York continued to apply the federal standard for determining the admissibility of expert opinions promulgated in the case of Frye v. United States, 293 F. 1013 (D. D.C. 1923), even after it was replaced when the Federal Rules were amended to adopt the more enlightened principles pronounced by the U.S. Supreme Court in Daubert v. Merrell Dow Pharms., 509 U.S. 579 (1993)?

New York should rectify this anomalous situation before it is too late.

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Kevin Schlosser is a Shareholder at Meyer, Suozzi, English & Klein, P.C., where he is Chair of the Litigation and Alternative Dispute Resolution Department which has a full roster of available private judges from virtually all disciplines of law. Mr. Schlosser also authors the popular blog, “New York Fraud Claims,” which analyzes the latest developments concerning civil fraud claims under New York law.

Reprinted with permission from the December 23, 2015 issue of New York Law Journal. 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.