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N.V.E., Inc v. Jesus J. Palmeroni

September 21, 2011


The opinion of the court was delivered by: Honorable Esther Salas, United States District Judge


This matter comes before the Court on the motion of Defendant Jesus J. Palmeroni for spoliation sanctions, specifically seeking that (1) Plaintiff NVE, Inc. ("NVE") be excluded from offering evidence relating to the Smart World claims dated prior to 2005; (2) the jury may draw an adverse inference from NVE's non-production or destruction of evidence*fn1 ; (3) NVE provide Mr. Palmeroni with a full accounting of the destroyed and preserved documents and any relevant litigation hold letters; (4) NVE pay monetary sanctions in an unspecified amount; and (5) NVE pay Mr. Palmeroni's costs and attorneys' fees related to the filing of the instant motion. (Docket Entry No. 180, the "Motion"). The Court has considered the parties' submissions and the arguments and testimony elicited at the May 26, 2011 hearing. For the reasons set forth herein, Mr. Palmeroni's motion for sanctions is hereby GRANTED IN PART and DENIED IN PART.


A. The Complaint

NVE manufactures, distributes and sells nutritional supplements. Docket Entry No. 199, First Amended Complaint dated May 18, 2011 ("Am. Complaint") at ¶ 7. NVE partners with brokers and distributors who sell NVE's products in exchange for commissions from NVE. Id. at ¶ 39. NVE employed Mr. Palmeroni first as a salesman and then later as the Vice President of Sales from 1999 to 2006. Id. at ¶ 37. During that time, NVE alleges that Mr. Palmeroni entered into secret arrangements with certain brokers who purchased NVE products for payments in exchange for assignment or manipulation of NVE accounts. Id. at ¶ 40. In addition to the kickback scheme, NVE alleges that Mr. Palmeroni and a fellow NVE employee, Vincent Rosarbo, formed an entity called Smart World, Inc. ("SW US"). Id. at ¶ 16. NVE already maintained a relationship with a European distributor located in the Netherlands, also called Smart World ("SW Netherlands"). Id. NVE contends that Mr. Palmeroni used SW US to purchase NVE products at a lower international sales price without ever intending to export them and resold the products in the United States, thereby undercutting NVE's sales. Id.

B. The Motion

On February 15, 2011, Mr. Palmeroni filed the Motion for NVE's alleged spoliation of evidence. Mr. Palmeroni seeks sanctions against NVE for failing to provide discovery because of NVE's alleged destruction of documents relevant to this litigation. In addition, Mr. Palmeroni also notes that NVE did not inform him of the destruction of any documents until November 2010 when NVE's counsel referenced the unavailability of the documents in a letter. See Docket Entry No. 180, Brief in Support of Motion to Sanction NVE for Spoliation of Evidence ("Moving Brief") at 2. Mr. Palmeroni contends that NVE was on notice of the claims in this litigation no later than January 2006 (when NVE terminated Mr. Palmeroni) and therefore should have ensured that all relevant documents were safeguarded and produced. Moving Brief at 5 - 7. At minimum, Mr. Palmeroni argues that NVE was on notice to preserve documents relating to Mr. Palmeroni, customer and brokers Mr. Palmeroni interacted with, persons identified in the Rule 26 disclosures and other sales personnel. Id. at 9.

Mr. Palmeroni's Motion blends missing documents (see footnote one) and sources it alleges that NVE destroyed. The sources at issue are the MACS accounting system, a storage room containing documents from the 1980s to 2004, Mr. Palmeroni's NVE issued laptop, the email server containing emails prior to 2004 and Mr. Palmeroni, Mr. Rosarbo and Mr. Palmeroni's assistants' email accounts (the "Email Accounts"). The Court will address the documents and sources below.

C. Documents at Issue

As an initial matter, the Court notes that Mr. Palmeroni listed a number of categories of documents that he alleges are either missing and/or NVE destroyed. Many of these categories overlap and are only vaguely described in Mr. Palmeroni's submissions. During oral argument, the Court discovered that many categories of documents are not ripe for a sanctions motion but instead should be dealt with through a motion to compel. Specifically, the Court believes that many of the so-called missing documents were not destroyed, but instead never existed in NVE's files. For example, Mr. Palmeroni took issue with the documents produced from his personnel file, however, the Court is convinced that NVE produced what it maintained in the regular course of business. Merely because a party is displeased with the documents produced does not mean that spoliation sanctions are warranted.

Due to the confusion surrounding whether the missing documents have been destroyed or in fact never existed, the Court will instead address the request for sanctions relating to the sources of documents that NVE allegedly destroyed: (1) the MACS computer system containing accounting and financial data prior to 2005; (2) the paper files destroyed by NVE's receptionist in 2009 as directed by NVE's Chief Financial Officer, Erling Jensen; (3) the Email Accounts; (4) Mr. Palmeroni's hard drive in his NVE issued laptop; and (5) the email server containing emails prior to 2004. For the remaining categories of documents that Mr. Palmeroni claims NVE has not produced, Mr. Palmeroni is directed to file a motion to compel within thirty days of the issuance of this opinion. After resolving the motion to compel, the Court will then consider whether any documents found to be missing may be the subject of another spoliation motion.

i. MACS System

Prior to November 1, 2005, NVE utilized the MACS System, at minimum, as an invoicing system. Beyond data entry and invoices, the parties cannot agree on a description of the records maintained in the MACS system. NVE states that the MACs system contained billing, shipping and customer information from mail orders and did not contain accounting or financial documents. Transcript dated May 26, 2011 ("Transcript") at 20:4 to 12, 38:18 to 39:16, 41:8 to 11.Mr. Palmeroni believes that the MACS system maintained other records, including notes made by sales people and evidence of cash sales to support his counterclaim. Transcript at 89:9 to 19. On November 1, 2005, NVE upgraded to a system called MAS200, which tracks orders, invoices, accounting, financial and General Ledger data. By early 2006, after Mr. Palmeroni's termination date, NVE completed the transition thereby rendering the MACS system outdated. Docket Entry No. 186, Opposition to Motion for Sanctions ("NVE Opp.") at 3. While NVE still possesses the MACS system, it claims the data on it is inaccessible. Id.

ii. Storage Room Documents

NVE claims that, in 2009, it disposed of documents dating from the 1980s to 2004 in the ordinary course of business (the "Storage Room Documents"). NVE Opp. at 5. These documents included accounts payable, accounts receivable, time cards, purchase orders, commission statements, catalogs, correspondence files, marketing and promotional literature and other materials. NVE does not have a written document retention policy but alleges that Mr. Jensen confirmed that these documents did not relate to the litigation with Mr. Palmeroni. Id. NVE also claims that in 2009 it was not aware of the Smart World claims so it did not insure that documents related to Smart World were set aside. Id. at ...

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