This article first appeared in Entertainment Law Matters, a Frankfurt Kurnit legal blog.
A controversial federal rule on the preservation of electronic documents pending litigation has just been adopted by a New York State appellate court in Voom HD Holdings LLC v. Echostar Satellite LLC, 2012 NY Slip Op. 00658 (App. Div. 1st Dep't Jan. 31, 2012), a dispute between a television programming provider and a direct broadcast satellite television service. The Voom decision represents the first time a New York appellate court has followed the rule articulated in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003), in which the federal district court stated: "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." As Voom demonstrates, this may require in-house and outside counsel to put litigation holds in place even before litigation actually begins – or face the consequences.
The facts in Voom are typical of disputes between entertainment and media companies. In 2005, Voom and Echostar entered into a 15-year affiliation agreement in which Echostar agreed to distribute Voom's programs over the DISH satellite network (which Echostar owns). Echostar further agreed not to "tier" Voom's programming – that is, not to charge customers more for it than Echostar's other programming. Voom, in turn, agreed to spend a certain amount each year on programming, and to give Echostar audit rights to ensure that Voom complied with that agreement.
In less than two years, Echostar allegedly became unhappy with this arrangement; the Voom decision cites numerous internal memoranda where Echostar executives called the deal a "mistake," talked about implementing a tiering arrangement, and asking for a "full summary" of the "breach remedies." By June 2007, Echostar had invoked its audit rights, and had asserted its belief that Voom had not spent the money on programming it had promised. Letters and emails went back and forth between the parties for months, with Echostar making repeated threats of litigation and ignoring Voom's financial analysis showing the company had spent the requisite sums. By July 31, Voom became sufficiently concerned that the matter was going to be litigated that it implemented a litigation hold, including automatically preserving emails.
Echostar did not do that. Instead, it continued to threaten litigation through the summer and fall of 2007, despite internal analyses showing that Voom had complied with its obligations. Nevertheless, hoping that an aggressive strategy would induce Voom to agree to tiering, Echostar terminated the agreement on January 30, 2008, and Voom sued the very next day. Only then did Echostar implement a litigation hold. But this purported "hold" did not suspend the automatic deletion of emails under Echostar's document control system, which purged emails after seven days. It was not until June 2008 – four months after litigation began, and one year after it was first threatened – that Echostar stopped deleting emails.
When Voom learned of all this during discovery, it accused Echostar of spoliation of evidence, and sought an adverse inference from the trial court. Citing Zubulake, the trial court agreed, and Echostar appealed. The New York appellate court affirmed. It noted that "'in the world of electronic data, the preservation obligation is not limited simply to avoiding affirmative acts of destruction. Since computer systems generally have automatic deletion features that periodically purge documents such as email, it is necessary for a party facing litigation to take active steps to halt that process.'" In implementing such a litigation hold, the company "must direct appropriate employees to preserve all relevant records, electronic or otherwise, and 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, direct that routine destruction policies such as auto-delete functions and rewriting over emails cease, and describe the consequences for failure to so preserve electronically stored evidence." All of this, the court said, must be done with "the guidance and supervision of counsel."
The court found that Echostar had done none of this, and had allowed a year's worth of emails and other documents to disappear. It emphatically rejected Echostar's argument that a litigation hold could await the commencement of litigation. A party must implement the hold, the court held, when it "reasonably anticipates" litigation – i.e., "when the 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." According to the court, this moment came for Echostar when it first demanded an audit in June 2007. Whether or not it was ever negotiating in good faith, the court found that such negotiations "do not vitiate the duty to preserve evidence." And Echostar's actions were found to be particularly in bad faith because it had previously been sanctioned for spoliation, and after that had actually reduced the time it preserved emails from 21 days to 7 days – truly a terrible fact. The court held that Echostar's failures "entitled a finder of fact to presume the relevancy of the destroyed electronic data" and required an adverse inference charge to be given to the trial jury.
Hard cases, however, sometimes make bad law, and such is the case here. The Zubulake standard places tremendous burdens on in-house and outside lawyers alike. It requires them to adhere to a vague "reasonably anticipates" standard in implementing litigation holds, making timing pure guesswork in dynamic negotiations between business entities – with the lawyer's judgment subject to "Monday morning" quarterbacking years after the fact. Moreover, it requires lawyers to get directly involved in implementing the hold, even if the lawyer has never before worked with the company, is not familiar with its technology or document retention system, and does not know its employees.
We can only hope that New York's highest court, the Court of Appeals, adopts a less rigorous standard. Until then, lawyers representing companies involved in nascent disputes must: (a) implement litigation holds as soon as a formal demand is made against their client; (b) ensure that the litigation hold is complete (i.e., that all automatic deletion features are turned off); and (c) ensure that all relevant employees are informed about and understand the litigation hold.
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