General Intellectual Property Litigation

NY Appeals Court: Failure To Issue Litigation Hold Is Not Necessarily Gross Negligence

OK so this is not a sexy topic, like the Presidential Debate or Lindsay Lohan’s courtroom attire, but it is important. In a decision that will surprise many litigators, the U. S. Court of Appeals for the Second Circuit (which covers NY) recently held in Chin v. Port Authority that the failure by a law firm to issue a litigation hold to its client is not automatically gross negligence. This decision runs directly counter to Judge Shira A. Scheindlin’s controversial ruling in Pension Committee Of Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, that “the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.” Judge Scheindlin’s opinion in that case was given great deference because she was the one to originally craft the framework for preserving and exchanging electronically stored information (ESI) in a line of cases called Zubulake.

Since Zubulake litigators have advised clients to preserve all ESI at the first hint of trouble with a competitor, an employee or any third party who may someday make a claim against the client. My firm sends out a written litigation hold with the retainer agreement just to be safe and make sure the client understands the importance of preserving all ESI, such as emails, electronic memos, texts, etc. If a court finds you to be grossly negligent in failing to preserve ESI, you could suffer severe sanctions including having a jury told that they may consider that the documents were destroyed because they were bad for the destroyer (called an adverse inference); being unable to contest a particular document or issue put forth by your adversary; or even not being allowed to litigate the case any further. Monetary penalties and reimbursement of legal fees are also often awarded upon a finding of “gross negligence.”

The Second Circuit, however, instead opted for a balanced approach toward sanctions, holding that the failure to issue a litigation hold was only “one factor in the determination of whether discovery sanctions should issue.” In addition, the Second Circuit clarified that “a finding of gross negligence merely permits, rather than requires, a district court to give an adverse inference instruction.” The Second Circuit said it preferred a “case-by-case approach to the failure to produce relevant evidence” and left that determination to the sound discretion of the district court. So not only is failing to issue a litigation hold no longer gross negligence as a matter of law, gross negligence no longer automatically requires harsh sanctions.

Now, this is not a green light for lawyers to stop sending litigation holds. The Second Circuit did not go that far and say that a hold is not required or isn’t the best practice. It still clearly is and failing to do so will be one factor (probably a strong one) that district courts take into consideration. But it provides welcome relief from the harsh, automatic ramifications of the Pension Committee case. At least now you will be able to argue the point and plead your case to the district court judge as opposed to having to just bend over and saying “Thank you sir may I have another.”

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