Spoliation, Intentional or Not, Can Destroy Your Case

Spoliation has become a potent litigation weapon in today’s world of electronically stored information.   Last week’s NY Appellate Division decision in Pegasus Aviation I v. Varig Logistica S.A. is an example of the wisdom of taking significant steps to preserve electronically stored information in order to avoid sanctions which may, in effect, destroy a defense.

The trial court had ordered that an adverse inference was appropriate on the issue of whether a defendant was the alter ego of another defendant -- ruling that the party allegedly responsible for the acts of the other was grossly negligent per se in not taking steps to ensure that the subsidiary (now bankrupt) corporation implement a litigation hold. The information had been lost in two hardware/software crashes. 

In other words, a party disputing a claim that it exercised sufficient control over another corporation, was pretty much denied that defense because it didn’t exercise control.  I’m overstating this a bit, as the court looked at all the facts and found a duty existed, and an inference isn’t a finding of fact.  But it does seem that the more one exerts control over another corporation the more likely the finding that it is an alter ego. 

The Appellate Division majority reversed and did not impose any sanction after applying the following rule:

A party seeking sanctions based on the spoliation of evidence must demonstrate: (1) that the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and finally, (3) that the destroyed evidence was relevant to the [moving] party's claim or defense such that the trier of fact could find that the evidence would support that claim or defense. (citations omitted)

The majority opinion seemed to carefully apply the facts to this three-part test and the decision appeared very well reasoned.

However, two justices on the panel did not agree. There was one partial dissent – that reasoned that some sanction was warranted, and one complete dissent, which found that there was gross negligence and the sanction of an adverse inference should be affirmed. It reasoned that before the computer crashes, steps should have been taken to preserve the materials “such as printing hard copies of the material or taking images of the hard drives.”

Gross negligence. A lot of lawyers wish it were this easy to prove.

Maybe there is much more in the record that explains this hard line, but this appears to be a very complex dispute.  A timeline of the dispute between the plaintiff and original defendant, and a footnote, which describes significant litigation among defendants and shareholders -- much of which occurred in other jurisdictions -- suggest that this is an unusual, complicated scenario.  Yet, the trial court and two appellate judges were willing to impose onerous sanctions, which in the days of paper would have been virtually impossible to obtain.   All the more reason to do everything you can to preserve electronic information when faced with a claim.   


Limitations Of Damage Provisions In Contracts Need Attention: Avoid Boilerplate

Because they often contain the exact same language, it seems reasonable to suspect that contract limitations of damages paragraphs are simply boilerplate that is grafted on to parties’ agreements. The decision and dissent in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., decided by the NY Court of Appeals in March, suggest that this is not a good thing. It is an understatement to say that the line between general and special or consequential damages can be fuzzy. Therefore, parties entering a contract should be encouraged to reach agreement as to what they will be entitled to recover if the relationship sours. 

The Biotronik decision ostensibly involves the definition of general damages in a marketing, distribution arrangement that came apart after the developer had issues with regulatory approvals, was taken over by a larger company that had a competing product, and decided not to move forward with the product. The issue presented was: did the general damages sought by the marketer/distributor include its lost profits? According to the majority, in this situation lost profits were general damages.

The agreement stated – in language that I have certainly seem before -- that the parties would be limited to general damages in case of a breach: “Neither party shall be liable to the other for any indirect, special, consequential, incidental, or punitive damage with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason." The majority opinion discussed whether lost profits were general or specific damages for nine pages; the dissent for eleven pages. There were almost four pages of footnotes. 

Frankly, whether you or I agree with the Biotronik majority or the dissent, the case illustrates the lack of clarity in this area. I understand that parties who are entering an agreement might be reluctant to discuss what will happen if things go wrong, but to avoid protracted disputes it is a really good idea to really pay attention to these provisions and to have an understanding regarding the meaning of any limitation of liability at the outset. Failure to do so can be a gamble by the parties.



Second Circuit Clarifies Standard of Review of Consent Decrees

I had some free time, so I downloaded yesterday’s Second Circuit decision in SEC v. Citigroup Global Markets, Inc., probably in hope of finding some entertaining snarky quotes.  Instead, I found a decision that strongly supports the rule that a court is to give deference to an agency’s decision to settle a claim -- by carefully delineating the scope of a district court’s review of a settlement that includes a consent decree. 

The Second Circuit ruled that a court reviews a consent decree, which includes injunctive relief, to “determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved.” Slip Opinion at p. 19. (Citations and internal quotes omitted.) Missing from this standard is a requirement that the settlement is adequate, which the decision notes is a standard for review of a class action settlement, not an agency settlement.

In reviewing the consent decree, the court may consider four factors: 1) the basic legality of the decree, 2) whether the decree’s terms – including its enforcement mechanism are clear, 3) if it reflects a resolution of the actual claims set forth in the complaint, and 4) whether it is tainted by improper collusion or corruption of some kind. Slip Opinion at p. 20.

The English major in me is fascinated by the idea that the standard includes a double negative: “the public interest would not be disserved.”  Apparently, in this situation, a double negative does not equal the positive: if the public interest had to be served, a finding of adequacy might be necessary.  The court did recognize: “Trials are primarily about the truth. Consent decrees are primarily about pragmatism.” 

This decision is helpful for anyone looking for direction on the standards of review of settlements, where review is necessary.


When Arbitration Provision Is Governed By The Federal Arbitration Act, Court May Only Rule On Validity Of That Provision - Not The Underlying Claim

 In Nitro-Lift Technologies v. Howard, a short, unanimous, per curiam opinion decided yesterday, the US Supreme Court left no doubt that, in a dispute governed by the Federal Arbitration Act, a court may only determine if the arbitration provision may be enforced; an arbitrator is to determine if the remainder of the contract is enforceable.

An employer had served two former employees with a demand to arbitrate on the ground that they had breached non-compete agreements. The former employees filed a suit in an Oklahoma state court, which asked the court to declare the non-compete agreements null and void and to enjoin their enforcement. The trial court dismissed the suit on the ground that the contracts contained valid arbitration provisions and enforcement was to be determined by the arbitrator. The Oklahoma Supreme Court reversed holding that the existence of an arbitration agreement doesn’t prohibit judicial review of the underlying agreement. 

To say that the US Supreme Court disagreed is an understatement. Anyone needing a citation regarding the Federal Arbitration Act's policy in favor of arbitration or the Supremacy Clause should use this case – it reads as if the author decided to drive a stake through the heart of any court that decides its local laws and policies trump federal law.


Make Sure Your Indemnity Covers Collecting on the Indemnity

If you want to be indemnified for the cost of pursuing an indemnity, make that clear in your indemnity clause. That is the message that I get from this week’s decision by the First Department in 546-552 West 146th Street LLC v. Arfa

Courts don’t like indemnity provisions. And, in my personal experience, they really don’t like enforcing indemnities against losing plaintiffs. I can see the thought going through the judges’ brains: wasn’t it enough we let you, defendant, out for nothing, now, you want us to make the poor plaintiff pay you. Defense lawyer, thinking: well, yes, because we have a contract (and my client has suffered and doesn't like the plaintiff anymore). 

Anyway, back to Arfa. The initial dispute -- between a limited liability company and some of its members -- was dismissed years ago on a finding that the plaintiff LLC lacked standing.   Then, the indemnity battles commenced. 

This appeal involved the issue of whether defendants were to be indemnified by plaintiffs for expenses incurred in trying to get indemnified.  As far as I can tell, defendants would be seeking -- at a minimum:

·      expenses incurred in connection with an initial motion for indemnity,

·      an appeal (decided in 2009) of the indemnity motion,  

·      a motion or conference on remand after the appeal,

·      preparation for and attendance at a hearing with a Judicial Hearing Officer,

·      a motion to confirm the JHO’s decision, and

·      this appeal. 

The costs of these battles probably exceed the cost of getting the case dismissed -- although that involved an appeal and a motion for leave to appeal to the Court of Appeals. Yes, this looks like the commercial litigation version of The War of the Roses, but it is a pretty standard response from a plaintiff who has been a) dismissed, and b) asked to pay its opponent’s lawyers for getting that dismissal, and from a defendant who had a contract to point toward.

On this appeal, the majority refused to indemnify defendant for fees incurred in pursuing indemnity. In other words, if you have fairly broad indemnity language, you only get indemnified for getting a case dismissed. If your opponent decides to scorch the earth before you get that money, well, you’re out of luck in NY – unless, (my idea) your indemnity clause states that you are indemnified to the full extent of the law, including, if permissible, costs incurred in pursuing indemnity.

I thought the dissent had the better arguments, and a very large portion of the majority opinion is spent addressing those arguments. The distinctions between legally permissible indemnity in the General Business Law and the LLC law are particularly interesting.

Given the history, a motion for leave to appeal to the Court of Appeals is on the way. Meanwhile, somewhere lawyers and paralegals are really tired of looking at defendants’  legal bills. 

(The appeal also reversed the Supreme Court’s rejection of block billing entries, which the JHO had accepted.)

Industry In-House Counsel Meetings May Be Evidence of Antitrust Violation

Every in-house lawyer planning on meeting -- or attending seminars -- with other counsel in his or her industry should carefully review last week’s decision by Judge Pauley in the In re Currency Conversion Fee Antitrust Litigation (Ross v. Bank of America) litigation. The decision reviews the meetings of counsel and finds that they raise questions of fact requiring trial of an antitrust conspiracy claim.  Among the topics discussed by counsel were arbitration clauses and avoidance of class action law suit abuse.

This decision might be a wake up call to lawyers going to any meetings with other counsel in their industries, including meetings or seminars that are firm/vendor sponsored.   Given this decision, it might be prudent to have an antitrust monitor and to read an antitrust caution at legal meetings and seminars.

First Department Decision Adopts Requirement for Preservation of Electronic Evidence When a Party "Reasonably Anticipates Litigation"

Yesterday, the First Department issued a decision in VOOM HD Holdings v. EchoStar Satellite that is must reading for any potential litigant. The court adopted the federal “Zubulake” standard that “once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold to ensure preservation of relevant documents.” Litigation is reasonably anticipated when an organization is "on notice of a credible probability that will become involved in litigation, seriously contemplates initiating litigation, or when it takes specific actions to commence litigation."

Because of defendant’s purported failure to preserve electronic data when litigation was anticipated, and its failure to halt email purges after litigation was started, and its prior issues with destruction of electronic evidence, the decision also discusses the standards for spoliation of evidence and sanctions.  The court was not impressed with defendant's argument that it was seeking an amicable business solution so there was no reasonable anticipation of litigation.

The bottom line is that defendant will be subject to an adverse inference -- the a jury will be charged to presume the relevance of the evidence that is not available.   In addition, the defendant will return to a judge who has already determined that it is grossly negligent in its management of litigation.

Agreement To Accept Tender Of Policy Limits To Settle All Claims Is Unconditional Contract

One of the things that I enjoy about being a lawyer is dealing with and learning new things every day. This weekend I learned that using the word “tender” as opposed to “offer” and being very careful in making certain that insurance proceeds were paid to the correct party was expensive for an insurer in Kansas.

Fajardo v. Safeco Insurance Co., from the US District Court for Kansas, was an action to enforce a settlement – not a wrongful death action, although the underlying claim arose following the death of Mr. Fajardo in an auto accident. Plaintiff-heirs claimed they were entitled to interest on the policy limits as they had not been paid within thirty days after they had agreed to a settlement with the other driver’s insurance company. (Payment within thirty days after an insurance settlement is a Kansas statutory requirement.  If payment is not made, interest begins to accrue at 18%.) The insurer countered that it was not required to pay the funds within thirty days because the statute did not apply, and because the payment was not due until the court had apportioned the settlement, which is required for a wrongful death recovery in Kansas.

Decision was in favor of the plaintiffs. The 30-day payment requirement applied and, because a settlement is not a “recovery”, apportionment was not necessary. Therefore, there was a settlement at the time that the plaintiffs accepted the tender:

“The parties have stipulated that the Defendant "tendered" (a stronger term than ‘offered’) policy limits to settle all claims stemming from decedent's death, and that Plaintiffs accepted the tender on the same terms. This was an ‘unconditional and positive acceptance’ which formed a contract.”

This is Kansas law and I’m not a Kansas lawyer, and there are some puzzling facts in the decision, but, the fact that a court would see a difference between being offered policy limits and being tendered policy limits got my attention. Presumably, a claimant might find him/herself irrevocably bound after indicating acceptance of a tender.  In any event, it is something to think about when making an offer, or accepting one.



WA State Supreme Court Reaffirms Rule that Arbitrator Rules When Plaintiff Challenges Validity of Entire Contract, But Court Rules When Validity of Arbitration Clause is in Issue.

I know I didn't do a blog post for more than three months and am now doing my second post in two days.  It isn't a New Year resolution, I simply came across two cases that seem to be of general interest to commercial lawyers.  Today's case shows the importance of the way in which a challenge to an arbitration clause is framed.  Challenge just the arbitration clause, you're in court; the entire agreement, you're in arbitration.

Everyone I know who has purchased a newly constructed home has had some issues.  The plaintiff-purchasers and children in Townsend v. The Quadrant Corporation apparently had more than some.  They sued in Superior Court for outrage, fraud, unfair business practices, negligence, negligent misrepresentation, rescission and breach of warranty.  The seller, and its parent and its parent corporation, moved to compel arbitration, based upon a clause in the purchase/sale agreement.  (The parent corporations’ motion for summary judgment was denied; the decision also discusses when compelling arbitration in waived.)

The Supreme Court ruled – in an opinion signed by four justices – that because plaintiffs challenged the validity of the entire purchase/sale agreement, not just the arbitration provision, the claim would be determined by an arbitrator.  The opinion ruled that the children’s claims, which tracked the parents’ claims would also be arbitrated on the theory of equitable estoppel.  

However, a concurrence/dissent signed by five justices stated that the children’s claims would not be subject to arbitration because they were not signatories to the purchase/sale agreement.

I have no idea or position regarding the merits of these claims, or the facts in this matter, and it is helpful for any business operating in this state to have the court speak on enforceability of arbitration clauses.   But this seems puzzling to me – why isn’t the concurrence/dissent the primary opinion, it is signed by the majority of the justices.  More disturbing is the apparent result that the non-signatory parent corporations are going to arbitration, while the non-signatory children will have a court determine these same claims.  I doubt this made anyone happy.

NY Appellate Division, 1st Dep't, Discusses Summary Judgment Procedure

An Appellate Division, First Department, decision handed down yesterday, Ostrov v. Rozbruch, should be must reading for any lawyer involved in filing a complaint, supplying a bill of particulars, or filing or responding to a summary judgment motion in New York state court. 

Defendant/doctor appealed the denial of summary judgment in regard to a medical malpractice theory that was more fully developed by the plaintiff in supplemental submissions after the initial oral argument of the defendant's summary judgment motion.  The Appellate Division unanimously ruled that supplemental submissions are only permissible in very rare circumstances that weren’t present in this case. Absent those rare circumstances, the CPLR procedure must be followed.  Summary judgment granted to the defendant.

For me, reading the decision – without the benefit of the entire record – this seemed pretty close as to whether the plaintiff had identified the issue in the complaint or the bill of particulars, and the trial court was trying to be fair to the plaintiff and defendant in allowing more briefing on the point. 

However, there seem to be policy considerations at work -- the opinion notes that summary judgment is supposed to be expeditious, and, in this case, seventeen (17) months had elapsed between filing of the motion and the trial court’s final order.  Therefore, my interpretation of this decision is: motions are to be decided, not held over; the CPLR is really the rule and second bites of the apple will be permitted only in the rarest of circumstances; and/or do not even think of sandbagging an opposing party with a new theory at the summary judgment stage, whether intentional or not.

In other (nicer) words, the lesson here is that a plaintiff must clearly plead all of his or her theories in the complaints and bill of particulars, and provide evidence to support them in opposition to summary judgment.  Maybe the message to the trial court is to exercise its discretion at risk of reversal.