HMS Holdings Corp. v. Arendt

Citation17 N.Y.S.3d 383 (Table)
Decision Date19 May 2015
Docket NumberNo. A754/2014.,A754/2014.
PartiesHMS HOLDINGS CORP., Health Management Systems, Inc., and HMS Business Services, Inc., Plaintiffs, v. Matthew ARENDT, Sean Curtin, and Danielle Lange, Defendants.
CourtUnited States State Supreme Court (New York)

17 N.Y.S.3d 383 (Table)

HMS HOLDINGS CORP., Health Management Systems, Inc., and HMS Business Services, Inc., Plaintiffs
v.
Matthew ARENDT, Sean Curtin, and Danielle Lange, Defendants.

No. A754/2014.

Supreme Court, Albany County, New York.

May 19, 2015.


Weil, Gotshal and Manges LLP (Salvatore A. Romanello, David R. Fertig, Jessie B. Mishkin and Aryeh Zuber, of counsel) New York, Bond, Schoeneck & King, PLLC (Arthur J. Siegel and Stuart F. Klein, of counsel), Albany, Attorneys for Plaintiffs.

(Christopher J. Cox, of counsel), Redwood Shores, CA.

Whiteman Osterman & Hanna LLP (Christopher E. Buckey and Nicholas J. Faso, of counsel), Albany, Attorneys for Defendants.

Opinion

RICHARD M. PLATKIN, J.

Plaintiffs HMS Holdings Corp., Health Management Systems, Inc. and HMS Business Services, Inc. (collectively “HMS”) commenced this action against defendants Matthew Arendt, Sean Curtin and Danielle Lange “to enforce [the former employees'] contractual promises to safeguard HMS's confidential, proprietary and trade secret information, to prevent unfair competition and irreparable injury to HMS's business interests, and to protect the goodwill of its business” (Complaint ¶ 1). HMS now moves pursuant to CPLR 3126 for the imposition of spoliation sanctions against defendants Curtin and Lange, alleging that they intentionally deleted and destroyed electronically stored information while under a duty of preservation. The relief sought by HMS includes an order of preclusion and an adverse inference.

BACKGROUND

The defendants in this action are former employees of HMS who are now employed by Public Consulting Group, Inc. (“PCG”). HMS alleges that defendants misappropriated its confidential information and trade secrets, including valuable technological, financial, customer and strategic information. Defendants allegedly distributed HMS's confidential information widely among themselves and others to assist PCG in its efforts to compete against HMS for contracts to provide third party liability (“ “TPL”) services. HMS further alleges that certain defendants are in violation of the obligations imposed by post-employment covenants. Defendants do not deny, as a general matter, that they possessed HMS's confidential information, but they do claim that such information was not used or accessed by them to assist PCG's competitive efforts and that they are not in breach of any contractual obligations.

This action was commenced on August 19, 2014. In response to this lawsuit and a companion action commenced in Texas against PCG and certain other former HMS employees (“Texas Action”), PCG circulated a Litigation Hold Notice (“Litigation Hold”) on August 25, 2014 to certain employees, including Curtin and Lange. The Litigation Hold advised recipients of their obligation to “preserve all records related to the subject of the complaints”, including electronically stored information (“ESI”) on computers, removable or portable storage media, office computers, cell phones and personal computers. Recipients also were directed to discontinue any type of data destruction. The Litigation Hold further advised that the failure to preserve and retain evidence may result in sanctions against PCG and responsible individuals. Accordingly, recipients were told to “err on the side of caution” and to contact PCG's Director of Legal & Compliance Services directly with any questions.

On September 25, 2014, the parties to this case and the Texas Action entered into a Stipulation Regarding Expedited Discovery, which was so-ordered by the Court on October 8, 2014. The Stipulation provides that defendants “shall forensically image for review a copy of all personal and work computer(s), flash or zip drive(s), cell phone(s), smartphone(s), tablet(s), blackberry(ies), personal digital assistants, or other electronic devices in their possession, custody or control, and the Parties will agree upon a protocol for searching such devices.”

In accordance with the Stipulation and a protocol later established by the parties, defendants produced to HMS and its retained computer expert, J. Christopher Racich, forensic images of certain personal computers and electronic devices, including: (1) Curtin's personal MacBook Pro laptop computer; (2) Curtin's PCG laptop computer; (3) Lange's PCG laptop computer; and (4) data extracted from an iPhone owned by Lange.

Racich opines, based upon his forensic review of the images, that Curtin and Lange (hereinafter “defendants”)1 intentionally deleted and destroyed ESI that is relevant to this lawsuit. HMS further argues that in light of the willful and deliberate nature of defendants' misconduct, the relevance of the spoliated ESI may be presumed and sanctions of preclusion and an adverse inference are warranted.

In opposition, defendants submit affidavits in which they acknowledge the deletion, destruction and loss of certain ESI while under a duty of preservation, but offer various explanations and excuses for the spoliation. Defendants also submit the affidavit of a computer forensics expert, Noel Kersh, who challenges certain of the conclusions drawn by Racich.

In a Decision & Order dated March 2, 2015 (“Prior Decision”), the Court held as follows:

Through the affidavit of its computer forensics expert and the documentary evidence submitted in support of the motion, HMS has made a prima facie showing that Curtin and Lange engaged in the spoliation of potentially relevant ESI with a culpable mental state during the pendency of this action. Defendants acknowledge the deletion, destruction and loss of certain ESI while under a duty of preservation. However defendants offer various explanations that, if credited, would lend support to their arguments regarding mental state, the relevance of the missing ESI and the sanctions, if any, to be imposed.... As determination of the motion rests, at least in part, on the credibility of defendants' averments, an evidentiary hearing is warranted.

In addition, the Prior Decision recognized that live testimony from the computer experts may assist in clarifying the technical issues before the Court.

Accordingly, an evidentiary hearing was held on March 24, 2015 to augment the written motion record. The Court heard the testimony of defendants and the parties' computer experts. In addition, Christopher Haley testified in an effort to corroborate certain aspects of Curtin's testimony. Post-hearing briefs were received, and this Decision & Order After Hearing follows.

LEGAL STANDARD

A.Spoliation

“A party seeking sanctions based on the spoliation of evidence must demonstrate: (1) that the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind'; and finally, (3) that 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” (VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33, 45, 939 N.Y.S.2d 321 [1st Dept 2012] ). The burden is on the party requesting sanctions to make the requisite showing (Duluc v. AC & L Food Corp., 119 A.D.3d 450, 452, 990 N.Y.S.2d 24 [1st Dept 2014] ).

A duty to preserve evidence is triggered once a party reasonably anticipates litigation, that is, when the “party is on notice of a credible probability that it will become involved in litigation” (VOOM, 93 A.D.3d at 43, 939 N.Y.S.2d 321 ). Such a duty plainly exists during the pendency of known litigation (Pegasus Aviation I, Inc. v. Varig Logistica S.A., 118 A.D.3d 428, 430–431, 987 N.Y.S.2d 350 [1st Dept 2014] ; Hameroff & Sons, LLC v. Plank, LLC, 108 A.D.3d 908, 909, 970 N.Y.S.2d 102 [3d Dept 2013] ).

“Spoliation sanctions are not limited to cases where the evidence was destroyed willfully or in bad faith, since a party's negligent loss of evidence can be just as fatal to the other party's ability to present a defense” (Standard Fire Ins. Co. v. Fed. Pac. Elec. Co., 14 A.D.3d 213, 218, 786 N.Y.S.2d 41 [1st Dept 2004] [internal quotation marks omitted] ). Accordingly, “[a] culpable state of mind' for purposes of a spoliation sanction includes ordinary negligence” (VOOM, 93 A.D.3d at 45, 939 N.Y.S.2d 321 ).

“The intentional or willful destruction of evidence is sufficient to presume relevance, as is destruction that is the result of gross negligence; when the destruction of evidence is merely negligent, however, relevance must be proven by the party seeking spoliation sanctions” (id.; see Hameroff, 108 A.D.3d at 909–910, 970 N.Y.S.2d 102 ). The spoliating party may rebut the presumption of relevance by establishing that there could not have been any prejudice to the innocent party (Voom, 93 A.D.3d at 45, 939 N.Y.S.2d 321 ).

B.Witness Credibility

The credibility of the witnesses who testified at the spoliation hearing plays an important role in determination of the motion. “The credibility of the witnesses, the reconciliation of conflicting statements, a determination of which should be accepted and which rejected, the truthfulness and accuracy of the testimony, whether contradictory or not, are issues for the trier of the fact.... The memory, motive, mental capacity,...

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