Maryland Business Law Blog

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.

New Decision May Limit Businesses' Use of Federal Act to Address Employee Computer Fraud

Posted by Edward Sharkey on Thu, 05/17/2012 - 22:22

One legal tool available to businesses to address fraud perpetrated by employees is the Computer Fraud and Abuse Act (CFAA). The CFAA creates penalties for persons who, with the intent to defraud, access computer systems without proper authorization.

"Without proper authorization" includes "exceed[ing] authorized access." In some cases, companies have used this language to bring claims against employees who were authorized to access the computer in question, but who then took confidential information and misused it, in violation of company policy.

Businesses like the CFAA because it provides for damages normally not available under state law. Now, a recent decision by the U.S. Court of Appeals for the 9th Circuit may limit the usefulness of the CFAA for this purpose.

In the case, an employee was indicted for using his log-in credentials to log into his employer's database and download confidential customer information. He took the information to start his own business. The employee was authorized to access the information, but his use of the information for his own business violated company policy.

The appeals court affirmed dismissal of the charges, holding that the CFAA is meant to address computer hacking or unauthorized access to computers. It is not intended to deal with persons who are authorized to access a system but who misuse the information found there.

The decision contrasts with decisions from other courts, which have interpreted the law more broadly, and it creates a split in the law that can only be resolved by the Supreme Court or congress. There is no decision addressing the issue in Maryland's federal circuit, the Fourth Circuit.

The takeaway for businesses: one tool for addressing misuse of confidential data by employees is potentially less reliable than it was (and it is ineffective in California and the rest of the states in the Ninth Circuit). Traditional claims under state law, however, are still available. A business should be sure to have a robust computer use policy in place and to publicize it to all employees.

Can You Terminate an Employee on FMLA Leave? If You Have a Non-discriminatory Reason.

Posted by Jeanine Gagliardi on Tue, 05/15/2012 - 16:55

Employers often ask whether the FMLA precludes terminating an employee who is on FMLA leave or planning to take leave. It can be confusing. The FMLA entitles employees to take leave for serious medical conditions. It is illegal for employers to terminate employees for exercising their FMLA rights.

The FMLA is not, however, intended to prevent the ordinary operation of employment policy and practices. More to the point, it is not illegal to fire an employee for a legitimate, non-discriminatory reason simply because they are on FMLA leave or plan to take leave.

A case decided last week by the U.S. Court of Appeals for the Sixth Circuit illustrates this principle. In the case, an employee was on FMLA leave to recover from a back injury. The employer asked the employee to perform part-time, light duty work while on leave.

The employee’s doctor informed the employer that the employee was not capable of performing the work. Four days later, the employee went to an Oktoberfest at which he walked ten blocks and consumed one or two beers. Co-workers saw the employee, and one of them reported it to the employer.

The employer investigated the employee’s condition and concluded that he had over-reported symptoms in order to avoid the part-time, light duty work. The employer considered this fraud and fired the employee. The employee sued, claiming that the termination was unlawful retaliation under the FMLA.

The court summarily rejected the employee’s claim. The court reasoned that the employer’s belief that the employee had acted fraudulently was a legitimate, nondiscriminatory reason for the termination. The employer was not required to be correct in its belief or have undertaken the best possible investigation. The employee’s claim “necessarily failed” because the employer’s decision to fire the employee was reasonably informed and based on particular facts.

The takeaway for employers: though the devil may be in the detail of each specific instance, it is legal to terminate any at-will employee for a non-discriminatory reason.

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