Inadequate Legal Hold Measures, and Resulting Spoliation, Warrant Sanctions

In re NTL, Inc. Sec. Litig., 2007 WL 241344 (S.D.N.Y. Jan. 30, 2007)

In this opinion, Magistrate Judge Andrew J. Peck granted plaintiffs’ motion for sanctions in the form of an adverse inference instruction and awarded plaintiffs their costs and attorneys’ fees incurred in connection with the sanctions motion and the additional discovery costs caused by defendant NTL Europe’s conduct.

The case was originally filed by class plaintiffs in April 2002 against a company then known as NTL, Inc. ("Old NTL"), and alleged federal securities laws violations.  Other individual plaintiffs, known as the “Gordon plaintiffs,” filed their complaint a few months later.  In the interim months, Old NTL and several of its subsidiaries entered into Chapter 11 bankruptcy, emerging in September 2002 with a Bankruptcy Plan.  Two main companies emerged from the bankruptcy:  NTL Europe, Inc. (“NTL Europe”), the successor company to Old NTL, and NTL, Inc. (“New NTL”).  NTL Europe was primarily responsible for selling off Old NTL’s unprofitable assets.  The Bankruptcy Plan specifically allowed the securities lawsuits to go forward after the bankruptcy against the individual defendants and NTL Europe, as successor to Old NTL, but only to the extent of NTL Europe’s insurance coverage.

The opinion discusses at length the history of the parties’ discovery requests and responses, and tracks the custody of documents and electronically stored information from Old NTL to NTL Europe and New NTL.  The court concluded that defendant NTL Europe had "control" and thus a duty beginning in March 2002, when litigation was actually foreseen by Old NTL, to preserve documents and ESI relevant to the litigation, even though most of the documents and ESI ended up in the physical possession of non-party New NTL.

Further analyzing the duty to preserve, the court found that the litigation hold memos issued in the case were insufficient since they subsequently were ignored by both NTLs.  While Old NTL circulated two document hold memoranda to certain employees in March and June 2002, many NTL employees never received the memoranda and there was no evidence that either of the two NTLs ever reminded employees (especially at New NTL) of the need to continue to preserve relevant documents and ESI.  NTL Europe’s counsel conceded that NTL Europe took no steps after bankruptcy to ensure that New NTL personnel continued the litigation hold.  As a result, NTL Europe (through New NTL) was only able to produce emails for 13 out of 57 requested current and former NTL employees who were the "key players" involved in plaintiffs’ allegations.

The court found that NTL Europe’s “utter failure” to preserve relevant documents and ESI was “at least grossly negligent,” and granted the Gordon plaintiffs’ motion for an adverse inference instruction, the precise wording of which would be determined by the District Judge.  The Magistrate Judge further advised that he would consider the adverse inference when issuing his Report and Recommendation on defendant NTL Europe’s pending summary judgment motion.