AJ Holdings Group v. IP Holdings, LLC and ICONIX Brand Group, Index No. 600530/2009, 9/15/14 (Scarpulla, J.).

By Michael Farinacci | Staff Writer

Contract; breach; adverse inference; electronic discovery; spoliation; sanctions

Plaintiff entered into a license agreement with defendants. Plaintiff alleged that defendants breached the agreement by prematurely terminating it without notice and failing to return $2.6 million dollars. Defendants alleged plaintiff’s failure to timely pay royalties was a material default and cause for terminating the agreement. Further, defendants allege that plaintiff consented to the early termination in exchange for a business recommendation. At a prior hearing, the court granted defendants’ motion to compel certain paper and electronic discovery to prove plaintiff consented to an early termination. Forensic examination of plaintiff’s computers and email servers revealed plaintiff’s duty to preserve electronic data arose three years earlier when an email placed plaintiff on notice of potential litigation. However, the examination also revealed that plaintiff did not preserve emails during the relevant time period. Further, the computers and Blackberries that were used during the relevant period were replaced and discarded. Defendants moved for spoliation sanctions.

Spoliation sanctions are appropriate when the litigant intentionally or negligently disposes of crucial evidence before the adversary had an opportunity to inspect it. Here, the court applied the three Zubulake factors to determine if spoliation occurred and whether sanctions were appropriate. A party seeking spoliation sanctions must establish: “(1) the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a ‘culpable state of mind;’ and (3) the destroyed evidence was ‘relevant’ to the party’s claim or defense such that a reasonable trier of fact could find that it support that claim or defense.”

The court determined plaintiff bore an obligation to preserve its emails from the relevant period. The court found plaintiff had a culpable state of mind because plaintiff failed to implement a litigation hold or preserve emails after repeated warnings by legal counsel. A finding of gross negligence is supported, when a duty to preserve is triggered and the party did not issue a litigation hold. Here, plaintiff’s IT manager was not informed of the litigation hold until the day before his deposition. The court found that the plaintiff was grossly negligent in failing to implement a litigation hold. Lastly, the relevance of the destroyed emails to the defendants’ defense satisfies the third Zubulake factor.

The court determined an adverse inference that the missing emails would have favored the defendants was appropriate. Monetary sanctions were charged to plaintiff for the costs of the forensic examination and reasonable attorneys’ fees.

AJ Holdings Group v. IP Holdings, LLC and ICONIX Brand Group, Index No. 600530/2009, 9/15/14 (Scarpulla, J.).

Contract; breach; adverse inference; electronic discovery; spoliation; sanctions

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