Background
OSC Investment, L.P. acquired SwervePay, LLC, leading to a lawsuit where SwervePay’s former owners (Sellers) allege fraudulent inducement and seek earnout payments as damages. A key dispute arose over an “Earnout Statement” produced by the Buyers during litigation. This statement, which purported to show SwervePay’s progress toward earnout targets, presented take and conversion rates inconsistent with the Buyers’ own contemporaneous internal documents.
The Earnout Statement became central to the Buyers’ defense, who used it to argue that Sellers would not have achieved their earnout targets regardless of any alleged fraud, thereby undermining the Sellers’ proximate causation argument for damages. Sellers, however, vigorously challenged the reliability and admissibility of this statement, citing the Buyers’ failure to produce supporting documentation and the spoliation of crucial underlying electronic data.
The Delaware Court of Chancery heard arguments on the admissibility and weight of the Earnout Statement following trial, with Sellers contending that the Buyers’ actions prevented them from verifying the statement’s calculations, particularly given the lower take rates presented in the statement compared to other company records.
The Court’s Holding
Applying Court of Chancery Rule 37(e)(1) regarding spoliation of electronically stored information (ESI), the court determined that the Buyers were obligated to preserve the underlying Intacct data used to create the Earnout Statement. This obligation arose because the statement was generated during active litigation and formed the cornerstone of the Buyers’ defense on proximate causation. The court found that this critical data, consisting of transaction- and invoice-level details, was lost when the Buyers allowed their Intacct subscription to lapse in February 2024, despite having received multiple motions to compel its production.
The court concluded that the Buyers failed to make reasonable preservation efforts, as they were clearly on notice of the data’s relevance well before its loss. Furthermore, the court found that the Sellers were significantly prejudiced by this loss. The missing Intacct data prevented Sellers—and the court—from independently verifying the Earnout Statement’s calculations. This was particularly problematic because the statement’s implied take rate (0.17%) was substantially lower than rates found in other internal documents (0.61% and 0.92%), and the statement was prepared by individuals whom Sellers accused of fraud.
Given that the Buyers and their experts relied exclusively on the unverified Earnout Statement to assert that SwervePay would not have met its earnout targets, the court ruled that the Sellers’ inability to scrutinize the foundational data severely hampered their ability to challenge the Buyers’ causation defense. Consequently, the court, rather than imposing sanctions, opted to give the Earnout Statement’s take rate and conversion rate no evidentiary weight.
Key Takeaways
- Failure to preserve electronically stored information (ESI) that forms the basis of critical trial evidence, especially after being put on notice of its relevance, can lead to adverse evidentiary rulings.
- Courts may determine that lost data, even if originating from a third-party service, should have been preserved if it is central to a party’s litigation strategy and created during the dispute.
- Prejudice from spoliation can be established when the inability to verify the accuracy of evidence due to missing underlying data undermines a party’s ability to challenge key factual assertions, particularly those related to damages or causation.
Why It Matters
This decision serves as a critical reminder to litigators and their clients about the stringent obligations surrounding the preservation of electronically stored information in commercial disputes, particularly in cases involving complex financial calculations like earnouts. It underscores that data supporting key evidentiary submissions, even if stored with a third-party vendor, must be actively preserved once litigation is reasonably anticipated or underway. Failure to do so, especially when the data’s relevance has been challenged, can severely cripple a party’s ability to prove its case or defend against claims.
The ruling illustrates how a court may address spoliation without resorting to outright exclusion or harsh sanctions, instead opting to render compromised evidence effectively useless by assigning it “no weight.” This approach emphasizes the importance of data integrity and verifiability in presenting financial evidence, sending a clear message that self-serving statements unsupported by verifiable data, particularly when underlying data is lost due to neglect, will be viewed with extreme skepticism.