The duty to preserve potentially relevant evidence – documentary or electronic – arises when a lawsuit is reasonably anticipated. Although this is a subjective standard, Parlux Fragrances, LLC et al v. S. Carter Enterprises, LLC et al. illustrates a recent decision where a court imposed sanctions and an adverse inference because the defendants failed to preserve information after receipt of a letter warning of a potential litigation.
On or about April 18, 2012, defendants S. Carter Enterprises (“Carter Enterprises”) and Shawn Carter (“Jay-Z”) (collectively, the “Defendants”) entered a license agreement (“License Agreement”) with Artistic Brands Development, LLC (“ABD”), granting ABD the exclusive right to license and trademark the likeness of Jay-Z for a fragrance line. The parties also entered a sub-license agreement (“Sub-License Agreement”) with Parlux Fragrances, LLC (“Parlux”) and Perfumania Holdings, Inc. (“Perfumania”) (collectively, the “Plaintiffs”), allowing Parlux and Perfumania the exclusive right to promote and distribute Jay-Z branded fragrances, including the Gold Jay-Z fragrance.
From October 2013 to July 2015, Parlux contended that Carter Enterprises and Jay-Z continuously failed to meet their obligations pursuant to the Sub-License Agreement by: (i) refusing to make personal and/or public appearances in support of the Gold Jay-Z fragrance; and (ii) failing to assist in the development of additional fragrances for the Gold Jay-Z brand. As a result, on July 31, 2015, Plaintiffs sent Defendants a letter (the “Breach Letter”) detailing Defendants’ breaches under the various agreements, urging Defendants’ compliance with their obligations and advising Defendants should be guided accordingly or Plaintiffs would take all necessary action, including legal action. Defendants effectively ignored the Breach Letter. Approximately 6 months later, on January 25, 2016, Plaintiffs commenced a lawsuit against Carter Enterprises and Jay-Z alleging various breaches.
As is relevant here, Plaintiffs had to file a motion for sanctions predicated upon Defendants destruction of Jay-Z’s emails months after receipt of the Breach Letter. Specifically, Plaintiffs claimed Defendants were on notice of a potential litigation on July 31, 2015, when Plaintiffs sent the Breach Letter. In response, Defendants claimed the emails were deleted pursuant to a documented deletion policy governing Jay-Z’s emails. Defendants also argued the emails deleted were not relevant and no deletions occurred after the action was commenced on January 25, 2016.
To prevail on a motion for sanctions for failure to preserve evidence, the Court noted the moving party must establish that: (1) the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, (2) the evidence was destroyed with a “culpable state of mind,” and (3) “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” (Pegasus Aviation I, Inc. v Varig Logistica S.A., 26 NY3d 543, 547 , quoting VOOM HD Holdings LLC v EchoStar Satellite L.L.C., 93 AD3d 33, 45 [1st Dept 2012]). The Court further observed that one’s duty to preserve potentially relevant information occurs “once a party reasonably anticipates litigation, [at which time] it must suspend its routine document retention/destruction policy and put in place a litigation hold” (VOOM, 93 AD3d at 41; quoting Zubulake v UBS Warburg LLC, 220 FRD 212 [SD NY 2003]).
Here, the Court concluded Defendants should have “reasonably anticipated litigation” when it received around July 31, 2015, the Breach Letter, which advised “Parlux intends to take whatever action it deems necessary and appropriate to recover all of the losses it has sustained as a consequence of [Carter Enterprises] and [Jay-Z’s] failure to comply with the terms of the License Agreement.” According to the Court, Defendants’ failure to implement a litigation hold and the deletion of emails in January 2016 (days before the litigation was filed) “after they reasonably anticipated litigation and had an obligation to preserve evidence” was, at a minimum, grossly negligent. And so, because Defendants failed to preserve relevant evidence when a litigation was reasonably anticipated, Plaintiffs’ motion for sanctions and to impose an adverse inference against the Defendants at trial was granted.
This case is an important reminder that preserving evidence as soon as litigation is reasonably anticipated is critical. While the standard is a subjective one, a letter threatening legal action, as here, is sufficiently objective that litigation should have been anticipated, and one’s duty to preserve triggered. Thus, litigants and potential litigants should consult with an attorney prior to destroying or disposing of any potential evidence.
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*Thank you to first year associate, James Maguire in the Firm’s Uniondale office, for his research assistance related to today’s blog.