Employee Misappropriation of Trade Secrets Litigation Stresses Dangers of Willful Spoliation of Evidence; Texas Federal Court Orders Trial, Adverse Inference Instruction and Monetary Sanctions for Willful Destruction of Electronically Stored Information

The subject of spoliation of electronically stored information raises grave concerns for litigation generally, and in the hedge fund community in particular.  As we discussed in our February 11, 2010 issue, in Pension Committee of the University of Montreal Pension Plan v. Banc of Am. Sec., LLC, No. 05 Civ. 9016, 2010 WL 184312 (S.D.N.Y. Jan.15, 2010), Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York addressed the duties of hedge fund managers and investors to preserve electronically stored information in anticipation of litigation involving failed hedge funds, and the sanctions for negligent spoliation of such evidence.  See “Pension Committee Case Highlights Obligations of Hedge Fund Managers to Preserve Documents and Information in Anticipation of Litigation,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  The instant case, an employment dispute in the U.S. District Court for the Southern District of Texas, presents the next step in understanding this issue: what happens when the conduct complained of involves intentional spoliation?  On February 19, 2010, Judge Lee H. Rosenthal of the U.S. District Court answered that question.  He severely sanctioned defendants Nickie G. Cammarata and Gary Bell for their intentional spoliation of e-mails relevant to litigation with their former employer, plaintiff Rimkus Consulting Group, Inc.  The lawsuit arose over defendants purported use of trade secrets and proprietary information in forming a competing firm, U.S. Forensic, L.L.C., after resigning from Rimkus, and their alleged violation of non-compete and non-solicitation clauses in their employment contracts.  Rimkus moved for sanctions after discovering that defendants had destroyed e-mails relevant to the dispute.  Relying heavily on Pension Committee, Judge Rosenthal conducted an extensive analysis of spoliation law.  He found that defendants had a legal duty to preserve the e-mails in question; that they had committed a culpable breach of that duty; that the e-mails appeared to be relevant to the dispute; and that Rimkus suffered prejudice as a result of their destruction.  As a result, he imposed harsh sanctions: permitting the jury to hear detailed evidence of the defendants’ misconduct; providing the jury with an adverse inference instruction against them; and awarding Rimkus attorneys fees and costs resulting from the spoliation.  Notably, the court also cited the defendants’ spoliation and withholding of evidence as the basis to partially dismiss their motion for summary judgment.  We provide extensive detail the background of the action and the court’s legal analysis.

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