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The Failure to Preserve and Produce E-Discovery Can Turn the Tide

June 2012

In-house and outside counsel alike should take note of the recent decision by the United States District Court for the District of New Jersey in NVE, Inc. v. Palmeroni, 2011 WL 4407428 (September 21, 2011) in which the court issued sanctions against a plaintiff for not instituting the required litigation holds and counsel not properly overseeing discovery. The case serves as a model for how a seemingly strong case can be undercut by gaffes in failing to preserve and collect discovery.

The case started as a claim by NVE against a former employee, Palmeroni, for creating a scheme to secure improper kickbacks by entering into secret arrangements with certain brokers who purchased NVE products for payments in exchange for assignment of NVE accounts. NVE also alleged that Palmeroni formed a phony entity to purchase NVE products at the reduced international price and then resell them in the United States. Palmeroni denied the allegations and asserted a counterclaim.

Discovery revealed that NVE allowed certain records to be destroyed, including email accounts, a computer system with financial data, and the hard drive from Palmeroni’s laptop. Although some of the records predated the dispute, thereby making their relevance questionable, the destruction took place either after the termination of Palmeroni or after the lawsuit was commenced. Palmeroni moved for spoliation sanctions, seeking to exclude certain evidence, an adverse inference, an accounting of the destroyed documents, sanctions and costs and attorneys’ fees. The court found that NVE was grossly negligent in failing to preserve, collect and review the data. Notably, the court found that NVE’s culpability arose from NVE’s counsel’s failure to institute a litigation hold and the failure to supervise the document production process. The court was “extremely surprised” to learn that NVE and outside counsel left it to a non-lawyer (NVE’s CFO) to gather and produce documents, and that outside counsel never once visited the company’s offices during the five years the litigation was pending.

The court concluded that NVE improperly failed to preserve evidence. As for sanctions, the court did not dismiss the Complaint, because it did not believe the actions were in bad faith or intentional. Instead, the court ordered an adverse inference as to all of the deleted materials and attorneys’ fees to be assessed against NVE.

The lesson here for clients is that a party is “under a duty to preserve what it knows, or reasonably should know, will likely be requested in reasonably foreseeable litigation.” In this case, like many others, that duty arose when the company was on notice of such claims; here, at the termination of the employee. And, when the duty arises, a litigation hold is mandatory. For outside counsel, the message is clear, that they must be involved in the discovery process. It is not enough to leave the client on their own to navigate the relevance of categories of documents. Mishandling the preservation of documents in a litigation can turn the tide of a case overnight. 

For more information, please contact:

Adam K. Derman | Co-Chair of the Litigation Group | aderman@wolffsamson.com

A. Ross Pearlson | Co-Chair of the Litigation Group | rpearlson@wolffsamson.com