Commercial Litigation and Arbitration

Electronic Spoliation by Third Party — Adverse Inference

The defendant in In re NTL, Inc., Sec. Litig., 2007 U.S. Dist. LEXIS 6198 (S.D.N.Y. Jan. 30, 2007), did not have physical custody of the electronically-stored information that was lost, but it was subjected to an adverse inference because that information had been in its ‛control“ and — in the no-good-deed-goes-unpunished department — litigation hold memos circulated years earlier demonstrated awareness of the need to preserve the data. Facts in three sentences: This securities fraud class action was commenced before NTL, Inc., went into bankruptcy. Two entities emerged — the liability for the lawsuit was left with one of them (NTL Europe, the defendant), but all documents and electronically-stored information went to the other (New NTL, a non-party), together with the operating business. New NTL did a computer upgrade which decimated a great deal of electronically-stored information.

Magistrate Judge Andrew Peck found that defendant NTL Europe had control over the documents and electronically-stored information for three independent reasons: (1) it would be patently unfair to allow the post-bankruptcy structure that the defendants were involved in arranging to frustrate discovery; (2) a demerger agreement between the entities entitled defendant NTL Europe to access to the documents and electronically-stored information, and (3) the duty to preserve was triggered prior to the separation of old NTL into the two new entities and, in this setting, if defendant NTL Europe failed to preserver access to the documents under the demerger agreement, that would by definition constitute an inadequate litigation hold on the part of the defendant.

The NTL opinion conveniently sets out Second Circuit spoliation law. Where a party destroys potential evidence (1) in bad faith or (2) through gross negligence, that, alone, may justify an adverse inference instruction. If the party acts (3) negligently, an adverse inference instruction requires extrinsic evidence tending to demonstrate that the missing evidence would have been favorable to the movant. Held, gross negligence, at a minimum, was established, ‛an adverse inference instruction spoliation sanction against defendant NTL Europe is warranted in this case“ and ‛[t]his Court will consider the adverse inference when issuing its Report and Recommendation on defendant NTL Europe's pending summary judgment motion.“ P.S. Attorneys' fees were also awarded.

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