Failure to properly preserve electronic evidence continues to provide at-risk litigants with the ability to steer the court from scrutiny of the merits, and drastically shift the balance of litigation leverage.
The latest example of this is NVE, Inc. v. Palmeroni out of the District of New Jersey. This case involved NVE’s claims of breach of fiduciary duty against its former employee Palmeroni. At least on the specific Complaint allegations, NVE’s case against Palmeroni seems formidable — while working as a NVE salesman, the defendant allegedly entered into secret kickback arrangements with product purchasers, and formed a dummy entity with another NVE employee to divert sales of NVE’s products for their own benefit. Palmeroni was terminated in 2006 and later sued by NVE. Seems like a pretty good case, if the court and a jury could get to it.
But the defendant, not unexpectedly, had other ideas. After initial discovery and communications between counsel raised concerns, Palmeroni moved for spoliation sanctions claiming the NVE has discarded relevant documents and destroyed key sources of relevant information before the litigation commenced but after it was on notice of the potential for litigation. District Judge Esther Salas granted the motion, directing an adverse inference instruction and monetary sanctions in the form of attorneys fees incurred to pursue the missing evidence and costs of the motion. The Court specifically found that NVE:
- failed to institute and document a litigation hold as of the date of the defendants termination — years before the complaint was filed;
- permitted the retirement and effective destruction of an invoicing and sales data system at or around the time of the defendant’s termination;
- disposed of relevant stored documents — purportedly in the ordinary course of business — several years after the litigation hold was triggered, without knowledge of or input from counsel; and
- delayed in notifying the defendant of the destruction of the evidence until well into the discovery process.
Finding this conduct “grossly negligent” under the circumstances, Judge Salas stressed that the plaintiff “has been unable to clearly articulate the steps taken to preserve, search and produce the requested discovery.” Additionally, in addressing the litigation hold deficiencies and NVE’s somewhat vague assertion that they did circulate “an email” requesting preservation, the Court noted:
this Court has no proof of the content of this communication nor can the Court be convinced that [plaintiff’s CFO’s] memory is correct. Moreover, NVE’s counsel, …. hired in or around May 2006, admits that it failed to issue a written litigation hold. As to collection and review, NVE’s CFO, Mr. Jensen, who is not a licensed attorney, has been responsible for not only gathering documents to produce in discovery but making relevance calls without the assistance of counsel. The Court was extremely surprised to learn that Mr. Jensen has received of assistance from counsel, nor has any counsel … visited NVE over the five years this litigation has been pending to review documents. The Court cannot fathom how NVE can be confident that it has produced all relevant information and that no relevant information has been destroyed when there has not been a single attorney reviewing documents to confirm this fact is true.
The NVE opinion reinforces several now fundamental tenets of e-discovery and spoliation law:
- litigation hold obligations can arise years before a case is filed;
- the termination of an employee, under certain circumstances can trigger a litigation hold obligation;
- the inability to document and fully explain the litigation hold process can be fatal to a party’s contention that an effective hold was instituted;
- negligent conduct can support a spoliation finding and sanctions, including adverse inference;
- written litigation hold notices and effective follow up provide greater protection in the event of loss of evidence;
- whenever possible, parties should involve their counsel in all aspects of the litigation hold process, and particularly in decisions to retire systems, discard potentially relevant documents and replace or repurpose relevant computer software and hardware; and
- proper initiation and execution of a litigation hold is an obligation shared by parties and their counsel.
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