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december 2013
Beyond Dispute
A B u s i n e s s L i t i g a t i o n R e p o r t f r o m P h i ll i p s Ly t l e
Avoid Spoliation Motions by Ensuring
Continued Compliance with Litigation Holds
Attorneys and clients must collaborate to ensure compliance with litigation holds and
evidence-preservation orders. In Marcone APW, LLC v. Servall Company (Sup. Ct., Erie Cnty.,
Index No. 2010-7257), Phillips Lytle successfully represented plaintiff Marcone APW, LLC
(“Marcone”) in a matter involving Servall Company’s (“Servall”) alleged misappropriation of
trade secrets and confidential information. During discovery, Servall delayed or failed to
produce relevant electronic documents that existed around the time litigation commenced.
Marcone filed a spoliation motion and ultimately demonstrated that Servall had not
preserved all electronically stored information (“ESI”) relevant to the case.
continued on page 2
Attorney Advertising
IN THIS ISSUE / Avoid Spoliation Motions by Ensuring Continued Compliance with Litigation Holds 1–2 / Consider Tax Implications in Settlement
Agreements 3 / Big Move for Buffalo Office 3 / Guidance for Developers: Protect Against Liability Through Planning and Regulatory Compliance 4–5 /
In New York, Automatic Renewal Clauses Are Not So Automatic 6 / Spotlight 7 ■
“Avoid Spoliation Motions by Ensuring Continued Compliance with Litigation Holds” continued from front cover
Generally, spoliation is the “intentional destruction, mutilation,
Apart from the problems with obtaining backup tapes, Marcone
alteration or concealment of evidence, [usually] a document.”
argued that Servall did not make sufficient efforts to preserve relevant
Metlife Auto & Home v. Basil Chevrolet, 303 A.D.2d 30, 33-34
evidence. Although Servall’s chief operating officer testified that
(4th Dep’t 2002). In the context of ESI spoliation, the party seeking
he had multiple conversations with Servall employees regarding
sanctions “must demonstrate that (1) the party with control over
the preservation order, Servall employees never received a written
the evidence had an obligation to preserve it at the time it was
litigation hold letter containing instructions to preserve evidence.
destroyed; (2) that the records were destroyed with a ‘culpable state
Paradoxically, Servall management’s only written instruction directed
of mind’; and finally, (3) that the destroyed evidence was relevant
certain Servall employees to delete ESI from Servall’s system,
to the party’s claim.” Voom HD Holdings LLC v. Echostar Satellite
notwithstanding the Court’s preservation order.
L.L.C., 93 A.D.3d 33, 45 (1st Dep’t 2012) (citing Zubulake v. UBS
The evidence elicited during the spoliation hearing also
Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003)). Despite the
demonstrated that Servall employees continued their normal
widespread use of ESI, New York courts have noted the “paucity
email deletion practices, even after learning about the litigation.
of New York case law specifically addressing issues arising from the
Certain employees continued to “double delete” their emails (i.e.,
alleged destruction of electronic evidence.” Ahroner v. Israel Discount
delete emails from their inbox and from their deleted items box),
Bank of NY, No. 602192/03, 2009 N.Y. Slip. Op. 31526(U) (Sup.
which erased these emails from the server hosting the email service
Ct. N.Y. Cnty. 2009), aff’d, 79 A.D.3d 481, 482 (1st Dep’t 2010).
and that server’s backup systems.
By illustrating the grounds of the spoliation argument against Servall,
These emails’ content, however, was not entirely lost. Phillips
the following discussion provides insight into how New York courts
Lytle’s forensic computer analysis recovered emails demonstrating
currently apply spoliation law.
that certain deleted or unproduced emails involved Servall’s
Servall’s Spoliation
On July 20, 2010, soon after litigation began, the Erie County
Supreme Court ordered Servall to preserve certain documents,
including emails and other ESI, on backup tapes. On the same day
that the Court issued the preservation order, Servall’s attorney and
misappropriation and use of Marcone’s confidential information.
These emails indicated that other relevant documents likely were
not preserved, all to Marcone’s detriment.
Conclusion
A finding of spoliation may have significant consequences,
its chief operating officer discussed the need to immediately take steps
such as the striking of a pleading, resolution of issues in favor of
to secure and protect any evidence related to the matter. Servall’s
the prejudiced parties, precluding proof favorable to the spoliator,
attorney also forwarded a copy of the Court’s order and explained
or employing an adverse-inference instruction to a jury. Ortega v.
what steps Servall would need to take to comply with the order.
City of New York, 9 N.Y.3d 69, 76 (2007). Here, resolution of
Servall’s chief operating officer informed the attorney that Servall’s
the spoliation motion in Marcone’s favor proved instrumental
director of information technology would immediately begin making
to Phillips Lytle’s favorable resolution of the case.
copies from Servall’s ESI backup tapes. This and other conversations
Litigants and counsel are advised to take appropriate steps
on July 20, 2010 led Servall’s attorney to believe that Servall had done
to preserve evidence, utilize litigation holds when litigation is
what was necessary to comply with the preservation order.
anticipated or commenced, and fully comply with court rules
Evidence indicated, however, that Servall knew at the time
that its ESI backup process had been failing. To compound
and preservation orders.
This article is a collaboration by Business Litigation Attorneys
this problem, evidence indicated that Servall did not verify that
Alan J. Bozer, Partner, (716) 504-5700, abozer@phillipslytle.com;
the copies made from the ESI backup process were successful or
James D. Donathen, Partner, (716) 847-5476, jdonathen@phillipslytle.com;
complete. Servall’s counsel remained unaware of these problems
Joanna J. Chen, Associate, (716) 847-5433, jchen@phillipslytle.com; and
in obtaining the Court-ordered backup tapes.
Christopher L. Hayes, Associate, (716) 504-5725, chayes@phillipslytle.com. 2
■
Consider Tax Implications in Settlement Agreements
When considering settlements, it is also important to consider
severance pay under an employment contract. If a settlement payment
one of life’s certainties: taxes. A potentially taxable event may occur
is designated as underpayment of wages, underpayment of employment
whenever money changes hands—even in the context of a settlement.
taxes is implicated and withholding of taxes from the payment may
See Internal Revenue Code (“IRC”) § 61. Parties should understand
be required. See IRC Subtitle C.
the tax consequences of settling a litigated matter before signing the
settlement agreement and making or receiving
payments. The relevant considerations
It is not just employment lawyers who should review a settlement’s
tax consequences. Settlement of claims involving a contract
for services performed by an independent contractor
may include whether any required
could trigger an obligation to file a Form 1099.
payment will be treated as income
IRC § 6041. Claims involving Canadian
to the payee, be treated as a capital
companies could implicate requirements
versus ordinary gain or loss, be
under the Internal Revenue Code and/or
taxable and at what rate, affect the
international treaties, including reporting
basis of a particular asset, create
or withholding requirements. See IRC
a reporting obligation, be a deductible
business expense, or require withholding.
The settlement could also be treated and taxed
differently, both for the payor and for the payee, depending
Subtitle N. Payments made as part of
structured settlements (often used to settle personal
injury actions) can carry their own tax consequences.
While allocation of payments between causes of action cannot
on the type of claim, the causes of action involved, and the
always eliminate an undesired tax consequence, knowing about the
way payments are allocated in a settlement agreement.
tax implications of a settlement before incurring the obligation can
By answering these questions first, it may be possible to plan
for the tax consequences of a settlement payment by allocating or
characterizing the payments in a particular way. For example, if an
help parties make informed decisions about whether to settle, and
what to propose in a settlement agreement.
Please contact the co-authors of this article, Joanna Dickinson, Business
employee sues an employer for discrimination and the parties decide
Litigation Associate, at (716) 847-5498 or jdickinson@phillipslytle.com,
to settle, the employer can likely deduct, as a business expense, money
regarding settlement agreements, or Geanne M. Zanatta, Tax Associate, at
designated as wages, but could not deduct money designated as payment
(716) 847-7075 or gzanatta@phillipslytle.com, if you have any questions
for humiliation. Or suppose an employer settles a claim involving
regarding tax-related matters. n
Big Move for Buffalo Office
Phillips Lytle is pleased to announce the relocation of our
Buffalo office. We are moving right down the street from our
current offices, into the heart of the waterfront revitalization.
This exciting transition builds upon our 180-year history on
Buffalo’s lower Main Street. We look forward to seeing you
at our new address as of November 25, 2013.
One Canalside
125 Main Street, Buffalo, NY 14203-2887
(716) 847-8400
3
Guidance for Developers: Protect Against Liability
Recently, Phillips Lytle attorneys successfully appealed an award of punitive damages
against a developer found liable for flooding neighboring property. Unanimously reversing
the Appellate Division, the New York Court of Appeals held that the developer’s planning
and regulatory compliance negated any finding of the wanton and reckless or malicious
conduct required to support an award of punitive damages.
Punitive damages are meant to deter future wrongdoing by
punishing the defendant through an award in addition to a recovery
Background
The plaintiff, Paul Marinaccio, owned land adjacent to
of compensatory damages. In some cases, punitive damages greatly
that which one of the defendants, Kieffer Enterprises, Inc.
exceed the amount of compensatory damages. Because they can
(“KEI”), was developing into a residential subdivision.
be a harsh penalty, punitive damages are reserved for cases where the
Throughout development, KEI complied with all federal, state,
defendant’s conduct was immoral, willful and wanton, or malicious.
and local laws, obtained all necessary permits, and sought the
Although this is regarded as a high standard, it is not always clear what
assistance of wetlands, soil, and engineering experts. KEI drafted
constitutes conduct sufficiently egregious to impose punitive damages.
plans for the subdivision’s drainage system, which involved diverting
The decision in Marinaccio v. Town of Clarence, 20 N.Y.3d 506 (2013)
water through a storm sewer, mitigation pond, and a drainage
provides guidance. There, the New York Court of Appeals held that
ditch on plaintiff’s land. Both the Town Board and the Town
a defendant who relied on engineering experts, engaged in extensive
Engineering Department approved these plans. Plaintiff, however,
planning, and complied with all applicable regulations could not
claimed that the diversion was unlawful and that it flooded and
be held liable for punitive damages.
destroyed his land.
4
Through Planning and Regulatory Compliance
The Supreme Court Awards Punitive
approvals. The Court also noted KEI’s use of engineering and other
Damages and a Split Appellate
experts in designing the drainage plan. Id. Those facts demonstrated
Division Affirms
to the Court that KEI did not act with malice: “[t]his planning, if not
Plaintiff commenced an action in New York State Supreme Court
for trespass and nuisance. Plaintiff’s complaint alleged that KEI
routed ground water from the subdivision into a ditch on plaintiff’s
indicative of good faith, at least shows that KEI’s actions could not be
considered ‘wanton and reckless or malicious.’”
In so holding, the Court drew a distinction between the general
property, without permission, allegedly flooding his thirty acres of
commission of a tort and acts rendering the defendant liable for
vacant land. Although an easement had been granted to the Town
punitive damages—i.e. “something more” than the intentional tort
allowing that drainage, defendants’ trial counsel were unaware of the
alone is required to justify punitives. Id. As one judge observed
easement until the day of trial and the trial court precluded its use
during oral argument, if any intentional act were enough to award
at trial. The jury returned a verdict awarding plaintiff $328,400
punitive damages, then every successful intentional tort case would
in compensatory damages and an additional $250,000 in punitive
require a punitive damages award; and that is not the law. Id.
damages against KEI. After compensatory damages were settled by
Implications
KEI’s and the Town’s insurance carriers, KEI retained Phillips Lytle
to appeal the punitive damage award.
The Appellate Division, Fourth Department affirmed the punitive
Marinaccio’s holding provides guidance for developers and
similarly situated businesses and individuals. A developer who
drafts plans with the help of professionals and obtains all necessary
damages award, concluding that there was “a valid line of reasoning
governmental approvals ought to be protected from an award of
supporting the jury’s conclusion that KEI’s conduct was sufficiently
punitive damages. Phillips Lytle attorneys are already working to
egregious to warrant an award of punitive damages.” Marinaccio v.
apply this decision to dismiss a claim for punitive damages against
Town of Clarence, 90 A.D.3d 1599, 1600 (4th Dep’t 2011), rev’d,
a wind farm operator.
20 N.Y.3d 506 (2013). Phillips Lytle attorney Michael B. Powers
Contact Michael B. Powers, Partner in the Phillips Lytle Business
handled the appeal to the Court of Appeals.
Litigation practice, at (716) 847-5417 or mpowers@phillipslytle.com, should
The Court of Appeals Reverses The
you seek more information about planning and regulatory compliance. n
Award of Punitive Damages, Finding
Insufficient Evidence of Malice
The issue before the Court of Appeals was whether there
was sufficient evidence to support the award of punitive damages
against KEI. The Court held that while the drainage diversion was
intentional and caused plaintiff harm, that alone was insufficient
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reckless or malicious. Punitive damages may be awarded for conduct
is offering this newsletter in an electronic format as well
that represents a high degree of immorality and shows such wanton
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via e-mail, visit our website at www.phillipslytle.com
Marinaccio, 20 N.Y.3d at 512.
Searching the record, the Court found no evidence to suggest
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that KEI acted with such malice. To the contrary, the Court correctly
observed that KEI complied with all applicable local, state, and federal
laws and regulations, and had secured all requisite permits and
5
In New York, Automatic Renewal Clauses Are Not So Automatic
While many states regulate automatic renewal clauses, GOL § 5-903
is different in that (1) it applies to service contracts concerning real or
personal property, and (2) it expressly applies to both individuals and
companies. Thus, if a person or entity seeks to enforce an automatic
renewal provision to a contract for the service, maintenance, or repair
to real or personal property, the provider must give timely written notice
of the renewal, served personally or by certified mail. The notice must
call the renewal provision to the recipient’s attention, allowing the
recipient to timely exercise its right to terminate. If the beneficiary of
the automatic renewal clause fails to provide this notice, the contract may
be cancelled at any time. Ovitz v. Bloomberg, 77 A.D.3d 515, 516 (1st
Dep’t 2010), aff’d, 18 N.Y.3d 753 (2012). This is true even if the service
recipient makes payments under the contract after the renewal date.
Bloomberg L.P.’s Cautionary Tale
Ovitz v. Bloomberg L.P. illustrates the importance of complying
with GOL § 5-903. In June 2000, Bruce Ovitz and Bloomberg L.P.
(“Bloomberg”)—a provider of real-time financial data—entered into
a service contract to lease a desktop terminal, software, and other
Many industries utilize term contracts with automatic renewal
clauses to capture recurring revenue. An automatic renewal clause is a
contractual provision by which the contract is automatically renewed at
the end of the specified term unless one party to the contract provides
advance notice of its intention to cancel the contract, which typically
must be done by a designated date. Also known as “evergreen” clauses,
automatic renewal clauses are commonly used in a variety of serviceprovider contracts.
Section 5-903 of New York’s General Obligation Law (“GOL”)
addresses automatic renewal clauses contained in “contract[s]
for service, maintenance or repair to or for any real or personal
property.” GOL § 5-903 is designed to protect businesspersons
who find themselves “married” to self-renewing maintenance or
service contracts. Mobile Diagnostic Testing Servs., Inc. v. TLC Health
Care Network, 19 A.D.3d 1145, 1146 (4th Dep’t 2005). Because this
danger may arise in many contexts, courts broadly construe “service,
equipment for real-time financial information services. The two-year
contract contained a clause that provided for automatic two-year
renewals of the contract. In September 2008, Ovitz informed
Bloomberg that he wished to cancel the service. Bloomberg responded
that the service was automatically renewed through June 2010 and that
Ovitz would have to pay approximately a year’s worth of subscription
fees as an early-termination fee. Ovitz sued, alleging, inter alia, that
Bloomberg had failed to notify him of the renewal, as GOL § 5-903
requires. The Appellate Division, First Department held the service
contract’s automatic renewal provision inoperative and unenforceable
because “[Bloomberg] failed to provide the requisite notice to plaintiff
that the two-year subscription term was to be automatically renewed,”
(77 A.D.3d at 515-16), a decision that Bloomberg conceded to
be correct before the Court of Appeals (Ovitz, 18 N.Y.3d at 759).
Conclusion
To receive the benefit of an automatic renewal clause in a service,
maintenance, or repair.” Tel. Secretarial Serv. v. Sherman, 28 A.D.2d
repair, or maintenance contract, a New York service provider must
1010, 1011 (2d Dep’t 1967). Service contracts covering everything
provide proper, timely notice of the renewal to its customer.
from mobile MRI units to telephone answering services to vending
If you have a question, or would like more information about automatic
machines fall within the statute. 28 N.Y. Prac., Contracts Law
renewal clauses, please contact Business Litigation Associate, Chad W. Flansburg,
§ 28:21 (2009).
at (585) 238-2009 or cflansburg@phillipslytle.com. 6
n
Spotlight
Phillips Lytle Attorneys Named To Super Lawyers® List
Fifty-one Phillips Lytle attorneys were named to the 2013 Super Lawyers® magazine Upstate New York list, while six were cited as 2013 Upstate
New York Rising Stars and three were named to the 2013 New York Metro Super Lawyers® list.
The selections of Super Lawyers are made by Law & Politics, a division of Key Professional Media, Inc. of Minneapolis, MN. Each year,
Law & Politics undertakes a rigorous multi-phase process where peer nominations and evaluations are combined with third-party research.
Selections are made on an annual state-by-state basis. Law & Politics has been publishing Super Lawyers magazines across the country since 1991.
We are proud to announce that the following Phillips Lytle attorneys, within our Business Litigation practice, have received recognition
to the 2013 Upstate New York Super Lawyers® list:
Alan J.
Bozer
William J.
Brennan
Craig R.
Bucki
William D.
Christ
James D.
Donathen
Kevin J.
English
James R.
Grasso
Kevin M.
Hogan
Timothy W.
Hoover
Paul F.
Jones
Gary F.
Kotaska
Michael R.
Law
Kenneth A.
Manning
David J.
McNamara
Linda T.
Prestegaard
John G.
Schmidt Jr.
Ronald S.
Shubert
Lisa L.
Smith
Preston L.
Zarlock
Paul B.
Zuydhoek
Mark J.
Moretti
Paul K.
Stecker
Paul
Michael B.
Morrison-Taylor
Powers
James W.
Whitcomb
Thomas S.
Wiswall
Phillips Lytle Business Litigation
Phillips Lytle Associates from the Business
attorney named to the 2013 Metro
Litigation practice named to the 2013
New York Super Lawyers® list is:
Upstate New York Rising Stars list include:
Eric M.
Kraus
Jennifer A.
Beckage
Sean C.
McPhee
7
For additional information or advice, please contact one of our
Business Litigation attorneys listed below:
John G. Schmidt Jr., Partner, Team Leader
Preston L. Zarlock, Partner, Team Leader
Phillips Lytle has one of the
largest Business Litigation
practices in Upstate New York.
Covering every corner of
New York State, our attorneys
have extensive experience in
all phases of disputes,
including banking, contracts,
sales and product distribution,
services, financing,
construction, insurance
coverage, joint ventures,
employment, franchising,
licensing, leasing, real estate
finance and development,
trusts, shareholder and
partnership disputes, and
contract disputes.
Jennifer A. Beckage, Associate
Edward S. Bloomberg, Partner
Alan J. Bozer, Partner
William J. Brennan, Partner
Craig R. Bucki, Associate
Joanna J. Chen, Associate
William D. Christ, Partner
Andrew P. Devine, Associate
Joanna Dickinson, Associate
James D. Donathen, Partner
Spencer L. Durland, Associate
Kevin J. English, Partner
Chad W. Flansburg, Associate
Marc H. Goldberg, Associate
James R. Grasso, Partner
Christopher L. Hayes, Associate
Kevin M. Hogan, Partner
Richard E. Honen, Partner
Timothy W. Hoover, Partner
Myriah V. Jaworski, Associate
Paul F. Jones, Partner
Minryu (Sarah) Kim, Associate
Gary F. Kotaska, Partner
Eric M. Kraus, Partner
Michael R. Law, Partner
Craig A. Leslie, Partner
Amanda L. Lowe, Associate
Alisa A. Lukasiewicz, Special Counsel
Kenneth A. Manning, Partner
Michael L. McCabe, Associate
David J. McNamara, Managing Partner
Sean C. McPhee, Associate
Anna R. Mercado, Associate
Mark J. Moretti, Partner
Paul Morrison-Taylor, Partner
John A. Mosychuk, Associate
Kevin J. Mulvehill, Associate
Scott T. Peloza, Associate
Michael B. Powers, Partner
Linda T. Prestegaard, Partner
Todd A. Ritschdorff, Associate
Nicolas J. Rotsko, Associate
Jodie L. Ryan, Associate
Joseph B. Schmit, Special Counsel
Aaron M. Schue, Associate
Martin V. Schwartz, Special Counsel
Jennifer A. Shah, Associate
Ronald S. Shubert, Partner
Michael S. Silverstein, Associate
William J. Simon, Associate
Lisa L. Smith, Partner
Paul K. Stecker, Partner
Richard T. Tucker, Associate
Andrew J. Wells, Associate
James W. Whitcomb, Partner
Thomas S. Wiswall, Partner
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