Foot Locker employees allege the company made changes to the employee benefits plan in violation of ERISA.
Foot Locker employees allege the company made changes to the employee benefits plan in violation of ERISA. (Dwight Burdette)

Failure to put a litigation hold on documents that were inadvertently destroyed has cost Foot Locker a sanction in a case over a change in employee benefits.

Southern District Judge Katherine Forrest (See Profile) granted a plaintiffs’ motion for spoliation sanctions, saying the jury in an upcoming trial will be given an adverse inference instruction against Foot Locker.

Forrest made that ruling in the putative class action of Osberg v. Foot Locker, 07-cv-1358, a case bought by a Foot Locker employee who claims the company reduced benefits in a false and misleading manner and breached its fiduciary duty, in violation of Sections 102(a) and 404(a), respectively, of the Employment Retirement Income Security Act (ERISA).

Plaintiff Geoffrey Osberg filed suit in February 2007 alleging the athletic shoe company misled employees about its conversion from a defined-benefit plan into a cash-balance plan.

Osberg claimed Foot Locker violated ERISA by concealing the “wear-away” effect of the conversion—some older participants in the plan had their retirement benefits frozen until their cash-balance equalled and exceeded their frozen benefits.

But Osberg’s action came after two similar lawsuits relating to the same subject matter had been filed in June and November 2006.

“Despite these pending lawsuits, defendants did not issue a litigation hold on the relevant subject matter until Oct. 8, 2009,” Forrest said, even though Foot Locker’s own internal document retention guidelines called for a hold, and the company had been advised to issue a litigation hold memorandum by outside counsel at Proskauer Rose.

The June 2006 lawsuit, although voluntarily dismissed by the plaintiff, put the company on notice that it should have put a hold on the documents, she said. As a result, documents that could be relevant to the Osberg case were destroyed.

Discovery revealed two classes of documents that could not be recovered—scores of boxes stored at the company’s long-range storage facility in Camp Hill, Pennsylvania and handwritten notes and documents about the conversion kept by a Foot Locker manager.

Forrest granted summary judgment for Foot Locker in 2012 and denied spoliation sanctions as moot, but the Second Circuit upended the decision on two claims as it declined to decide whether the Section 102 claim was time-barred and vacated the dismissal of the §404 claim.

On remand, Forrest said the destruction of evidence in bad faith, or in some cases gross negligence, allows the inference that the missing evidence was favorable to the other party.

But where the destruction is the result of mere negligence, she said, it’s up to the complaining party to produce evidence that the destroyed material is relevant.

Osberg argued the defendants acted intentionally because they stated elsewhere they believed they would prevail in the litigation.

Forrest, while finding the defendants were obliged to issue a litigation hold memorandum as advised by Proskauer, nevertheless said the failure and the resulting destruction “was indeed inadvertent.”

She said Foot Locker vice president and associate general counsel Sheilagh Clarke and vice president and associate general counsel Dennis Sheehan “each stated that a litigation hold was required, but he or she mistakenly thought that the other was taking responsibility for preparing and distributing the memorandum.”

Foot Locker, she said, also acted to preserve other relevant documents and to notify third parties about their existence.

While there was no bad faith or gross negligence, she said the company was negligent, and Osberg had met his burden of proving the documents were relevant.

“In plaintiff’s account, Foot Locker management, wanting to save money but recognizing the loss of employee morale and confidence that would be associated with openly discussing the plan, decide to roll out a pension plan that would merely appear attractive while reducing benefits and cutting costs through the wear-away effect,” Forrest said.

And based on the evidence, she said, a “reasonable jury could find that the missing notes that accompanied the creation of the plan were at a minimum relevant to plaintiff’s claims” and would have been favorable to those claims.

Forrest said she will instruct the jury that “it can infer from the fact that defendants lost certain evidence that the evidence, if available, would have been favorable to the defendant.”

Eli Gottesdiener of Brooklyn represents Osberg.

Howard Shapiro, partner at Proskauer Rose, declined comment.