Costly Server Sale: Servers Erased In Asset Sale Lead To Adverse Inference for Spoilation

On August 23, 2016, Justice Eileen Bransten of the New York Commercial Division issued a decision granting a motion for spoliation sanctions in a six-year-old dispute involving Covista Communications, Inc. and Oorah, Inc., two telecommunications companies.  Oorah, Inc. v Covista Communications, Inc., 2016 N.Y. Misc. LEXIS 3104 (N.Y. Sup. Ct. Aug. 23, 2016).   Justice Bransten’s opinion serves as an important reminder that parties must institute a litigation hold and exercise care when erasing documents, even as part of an unrelated transaction, when they are in litigation or reasonably anticipate litigation.

After granting and denying in part the parties’ cross-motions for summary judgment, the Court turned to Oorah’s motion for spoliation sanctions pursuant to CPLR § 3216.  CPLR § 3216 provides that “[i]f any party . . . refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed, pursuant to this article, the court may make such orders with regard to the failure or refusal as are just, among them: . . . an order striking out pleadings or parts thereof . . . or dismissing the action or any part thereof . . . .” 

The request for sanctions arose out of a March 26, 2013 sale of assets by Covista to Birch, another telecommunications company.  The asset sale transaction occurred 18 months after the Oorah-Covista litigation began.  As a part of the sale, Covista’s servers, which held ESI relating to Oorah’s claims, were erased pursuant to “standard protocol” followed by Birch.  Covista did not disclose the sale of the servers months after their sale when the Court granted Oorah’s motion to compel production of certain documents.  The Court noted that Covista also “failed to institute a litigation hold.”

Under the standard articulated by the Court, to prevail on a motion for spoliation sanctions, a party 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 party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.”  Id. at *12.

Justice Bransten concluded that each of these factors was met—a point that Covista did not dispute.  Nevertheless, the Court noted that the obligation to preserve attached since Covista was already in litigation at the time of the sale of the servers.  As to the requirement for a “culpable state of mind,” the Court found that “[t]he transfer of the servers without a litigation hold in this context was done with a ‘culpable’ state of mind,’ since this element is satisfied by a showing of mere ‘ordinary negligence’ . . . .”  As to relevance, the Court found that the documents’ relevance is presumed and need not be demonstrated by Oorah.

Covista mainly argued that it should not be sanctioned because it produced documents crucial to Oorah’s ability to litigate the case.  Justice Bransten rejected this argument, noting that “there are an unknown number of documents previously stored on Covista’s server that also appear to bear on Oorah’s claims.”  Id. at *14-15.  The Court recounted the nature and relevance of the documents that were on the servers but were not preserved.  Id. at *15.

Next, the Court turned to the appropriate sanction.  The Court denied a request for dismissal of Covista’s complaint, noting that dismissal is only appropriate “where the spoliated evidence constitutes the sole means by which the [aggrieved party] can establish its [case], or where the [case] was otherwise fatally compromised, or [the aggrieved party] is rendered prejudicially bereft of its ability to [prosecute its claims] as a result of the spoliation.”  Id.  Instead, Justice Bransten imposed an adverse inference against Covista.  Accordingly, if this dispute reaches trial, the trier of fact may infer that the destroyed evidence would have been favorable to Oorah’s claims and defenses.

Justice Bransten’s opinion serves as an important reminder that the destruction of ESI after a duty to preserve has arisen could result in harsh sanctions.  Parties reasonably anticipating litigation should be mindful that the duty to preserve extends to documents that are relevant—not just documents that are critical to claims and defenses.  Moreover, the requirement of a “culpable state of mind” for spoliation sanctions may be satisfied by a showing of “ordinary negligence.” Further, parties should be mindful of their document preservation obligations when entering into transactions unrelated to the litigation that may nevertheless jeopardize the preservation of documents.

By Louis Russo and Muhammad U. Faridi