New York Judge Dismisses $20 Million Suit Due to Insufficient Litigation Hold

Posted by Edward Sharkey on Tue, 06/05/2012 - 20:00

One of the biggest challenges businesses face when a dispute arises is managing the preservation of relevant records and information. Courts are becoming more serious about imposing sanctions on parties for failing to preserve electronically stored information (“ESI”) once they have notice of litigation or potential litigation.

We usually recommend, and most companies utilize, a document retention policy that includes the automatic deletion of ESI - such as email stored on a company server - after a certain period of time.

Once the possibility of a lawsuit arises, however, a business must implement a litigation hold, the purpose of which is to preserve documents “potentially relevant” to the litigation.

As a recent New York case illustrates, a party's failure to apply a litigation hold may result in severe sanctions, up to and including the dismissal of a plaintiff's case.

In 2007, a property owner negotiated a transaction to sell its property. The owner was represented by a large law firm. The prospective buyer posted a $20 million letter of credit as a deposit, which expired on December 31, 2007. Due to an oversight, the owner did not draw the $20 million before the expiration date, and it lost the opportunity to do so. The owner later sued the law firm, alleging that the law firm failed to properly give it advice.

Ultimately, the court granted the law firm's motion to dismiss because the owner failed to preserve email, without regard to whether it would have been relevant to the case. The owner had notified its employees of the litigation hold, but several of its “key players” did not comply with the terms. Most notably, some failed to stop the automatic deletion of their emails, which resulted in the permanent destruction of email correspondence.

The court held that the "mere circulation of a litigation hold [was] insufficient” and that “a party must take affirmative steps to ensure that potentially relevant evidence is diligently identified and preserved.” The court held that the failure was “gross negligence.” Accordingly, the law firm defendant did not even have to show that the email would have been relevant to the case. Instead, the court inferred the relevance.

Had the owner been more diligent in ensuring that its employees obeyed the litigation hold, it may have had the opportunity to litigate its $20 million suit on the merits. Instead, the owner lost without ever getting its day in court.

The takeaway for businesses: when you have notice of a dispute, or reasonably expect a dispute to arise, be sure to implement an effective litigation hold to preserve relevant or potentially relevant documents. The loss or destruction of data will be held against you.

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