Appellate Division Says Adverse Inference Inappropriate Where Records Were Ultimately Produced

In a recent decision, the New Jersey Appellate Division held that a trial court’s adverse inference instruction for e-discovery misconduct was an unreasonably harsh penalty where the electronically stored information (ESI) was eventually produced. The Appellate Division’s opinion in Liberty Mutual Insurance Co. v. Viking Industrial Security, Inc. illustrates and reaffirms the principle that discovery sanctions must be just and reasonable, and proportional to the prejudice caused to an adversary, regardless of bad faith or willfulness of the misconduct.

In Liberty Mutual, defendant Viking Industrial Security (“Viking”) allegedly understated its payroll for the purpose of reducing workers’ compensation insurance premiums. Liberty Mutual terminated Viking’s policy and litigation ensued. During discovery, Viking was evasive in responding to Liberty Mutual’s request for electronic payroll records, first claiming the records didn’t exist and then claiming a lack of proficiency with the computer program where the records were maintained. When finally ordered to turn over the records, Viking produced another disc, this time missing information. Ultimately, the court granted Liberty Mutual direct access to Viking’s computer program to download the electronic records itself.

Thereafter, Liberty Mutual moved for sanctions. The court found Viking had acted in bad faith and engaged in a “calculated method of discovery misconduct,” and awarded Liberty Mutual costs and fees associated with obtaining the ESI. The court also issued two spoliation orders, conclusively establishing certain claims and granting an adverse inference as to others.

Viking appealed, arguing the spoliation orders were excessive under the circumstances, and the Appellate Division agreed. The Appellate Division emphasized that while trial courts have discretion to impose discovery sanctions (see Rule 4:23), such sanctions must be “just and reasonable.” The Appellate Division noted that a primary goal of discovery sanctions is to make the aggrieved party whole, and that if the prejudice from a litigant’s failure to timely make discovery can be eliminated and the parties placed in equipoise, then sanctions other than the dismissal of claims or defenses should be imposed. In overturning the spoliation order, the Appellate Division found that the motion judge erred by not considering lesser sanctions. Because Liberty Mutual obtained complete records and was able to use them extensively in preparation for trial, ultimately there was no prejudice to remedy beyond the fees and costs already awarded.

The Appellate Division’s analysis in Liberty Mutual is insightful regarding the evolving standards for imposing sanctions for e-discovery misconduct. Although trial courts have broad discretion to impose sanctions, it must be exercised subject to the equitable principals of proportionality and reasonableness. Even bad faith and willful misconduct may not warrant certain sanctions if actual prejudice is lacking.

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