e-Lessons Learned

In 2000, David Ronsen launched Orbit One Communications, Inc., a corporation that sold satellite communications services and manufactured tracking devices reliant on satellite technology. In 2006, Numerex Corp., another satellite communications company, initiated negotiations to acquire Orbit One. These negotiations resulted in a 2007 agreement for Numerex to acquire Orbit One’s outstanding assets. Numerex asked the three executives that were also equity owners in Orbit One, (Ronsen, Scott Rosenzweig, and Gary Naden) to continue to run Orbit One as a division of Numerex, to the tune of over $6 million in “incentives,” meaning that if certain projected earnings targets were met, they would receive “earn out” payments.

But April Fools! Big bonuses did not come as promised.

Sales fell short and needless to say, the execs were less than pleased. In conjunction with shareholders, they brought a suit against Numerex for interfering with the new division’s ability to meet the earnings targets by impeding Ronsen’s management of the division. Numerex counterclaimed. During the course of discovery, it was brought to light that when Ronsen’s laptop hard drive was replaced, Microsoft Word files had been lost. Over 2,000 files were found on the back-up drive that were no longer on the laptop.

The court adopted West’s definition of spoliation, stating it is “’the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’” Based on this definition alone, the loss of computer files would likely constitute spoliation. The court also states that a party can not only be sanctioned for violating a preservation order directly, but also be liable for sanctions if it cannot produce requested evidence because the evidence has been destroyed.

However, the court noted that when a party wants an adverse inference instruction based on spoliation, it has to establish the following:

1. That the party having control over the evidence had an obligation to preserve it at the time it was destroyed;
2. That the records were destroyed “with a culpable state of mind”; and
3. That the destroyed evidence was “relevant” to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.”

This is where things get dicey; destroyed evidence that cannot be produced must be shown to be “relevant” to the requesting party’s claim in order for an adverse inference instruction to be granted. This makes spoliation the chicken-or-the-egg dilemma of discovery sanctions. How can a party show evidence is relevant or not if they can’t get their hands on it? The court brought up the opposite argument, however, questioning how a party can be sanctioned for the purposeful or negligent destruction of evidence without a showing that the evidence was even “minimally relevant” to the case.

The court ultimately held that “‘[n]o matter how inadequate a party’s efforts at preservation may be… sanctions are not warranted unless there is proof that some information of significance has been lost.’”

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Article posted on April 1, 2011 at 4:06 AM |              More... 
Tagged as: Legal Hold/Preservation, Production of Data, Sanctions.
View more articles implicating: Owners/Executives, Upper Management
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