'Pegasus', Adverse Inference Charges and the FRCP

The New York Court of Appeals' decision in Pegasus Aviation I v. Varig Logistica S.A.,¹ appears to endorse the concept that an adverse inference jury charge may be premised on the failure to preserve electronically stored information (ESI). The decision raises interesting questions about the source, purpose and scope of a negligent adverse inference charge, and whether New York law is now at odds with recent amendments to the Federal Rules of Civil Procedure (FRCP).

Motion Court Decision

Upon an alleged default by Varig Logistica S.A. (VarigLog), Pegasus commenced litigation in Florida in February 2008. That suit was discontinued in October 2008 when Pegasus commenced suit in New York against both VarigLog and the “MP defendants.” The MP defendants were a group of commonly-controlled private equity firms and the sole shareholders of VarigLog. Pegasus sought to hold the MP defendants responsible for the loss of relevant ESI by VarigLog due to its failure to implement a “litigation hold.” The motion court struck VarigLog's answer and ruled that the jury would be instructed that “it may infer that the lost ESI would have supported the veil-piercing claim against the MP defendants.” It imposed sanctions against the MP defendants because:

(1) the MP defendants' control of VarigLog obligated them to see to it that VarigLog preserved evidence relative to this litigation and, in particular, that VarigLog instituted a litigation hold on its ESI; (2) that the MP defendants' failure to ensure that VarigLog implemented a litigation hold constituted gross negligence per se, … ; and (3) VarigLog's culpability rose to the level of gross negligence, where prejudice to plaintiffs could be presumed.

Appellate Division Decision

The Appellate Division found that the MP defendants had a sufficient degree of control over VarigLog to trigger a duty to preserve ESI. The majority, however, reversed the motion court's ruling that the MP defendants' failure to discharge that duty was egregious enough to rise to the level of gross negligence. The majority rejected the concept that the “failure to institute a litigation hold, in all cases and under all circumstances, constitutes gross negligence per se.” The majority disagreed with the full dissent, and found that only simple negligence “at most” had taken place and therefore “plaintiffs must prove that the lost ESI would have supported their claims.” The majority disagreed with the partially dissenting justice, who would have remitted the matter to determine the extent of the prejudice to plaintiffs from the loss of VarigLog's ESI to determine whether sanctions should be imposed.

Court of Appeals Decision

The court saw no reason to disturb the finding that the MP defendants had sufficient control over VarigLog to trigger a duty on its part to preserve. The court also found that there was no basis to disturb the findings by the Appellate Division that the MP defendants were negligent in failing to discharge that duty. The court, nevertheless, found that the Appellate Division majority erred by concluding that Pegasus had not attempted to make a showing of relevance. Essentially agreeing with the partially dissenting justice below, the court concluded that the prudent course of action was to remit the matter “for a determination as to whether the negligently destroyed ESI was relevant to Pegasus' claims against the MP defendants and, if so, what sanction, if any, is warranted.”

Duty to Preserve

The appellant's brief in Pegasus urged the court to adopt a uniform standard regarding the duty to preserve evidence before litigation commences, and called to the court's attention the distinction in the First Department between the standard adopted pertaining to ESI in Voom HD Holdings v. EchoStar Satellite² and the standard for other forms of evidence as set forth in Strong v. City of New York.³ In Voom and other cases involving ESI,⁴ the First Department adopted the standard set out in the Southern District of New York decision Zubulake v. UBS Warburg,⁵ which provides that “once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation 'hold' to preserve” ESI. In Strong, the First Department rejected application of that standard⁶ and relied instead on common law where the standard is whether the spoliator was “on notice” that the evidence “might be needed for future litigation.”⁷

Pegasus appears to assume a pre-litigation duty to preserve evidence, but the court did not address when and how specifically the duty could be triggered.⁸ The court did not set forth a preservation standard and did not resolve the distinction existing at least within the First Department as to whether there should be a different standard for ESI as opposed to other evidence.

Negligence as Basis for Sanctions

Some commentators have opined that there is a modern trend, commencing at least as of the 1990s, to permit negligence as a basis for a spoliation sanction, including for an adverse inference charge.⁹ In New York, as evidenced by Appellate Division decisions, negligence as a predicate for a spoliation sanction initially arose in the products liability context when a key piece of evidence in a manufacturing defect action was inadvertently destroyed.¹⁰ Thus, it appears that the court recognized that adverse inference charges “have been found to be appropriate even in situations where the evidence has been found to have been negligently destroyed.” As such, there is little doubt that spoliation sanctions in New York may be based on the negligent failure to preserve ESI evidence.

Source of Authority

The court, however, did not identify the source of a court's power to impose a spoliation sanction based solely on negligence. Rather, the court stated: