A Legal Pitfall For New Tech Businesses

Do you know the law as it pertains to defective software? If you are the last known person to possess the faulty merchandise and over time you have lost track of the “evidence,” you could lose your case if the client or insurer asks to see it.

You’ve designed/sold/distributed/installed software and the network collapses or, you’ve designed/sold/distributed/installed a card for the client’s server and the network collapses. The client is effectively out of business until you quickly return and save the day by replacing what is almost certainly defective software or a defective card. Although the damages have been contained, your client’s financial losses are significant and he wants compensation. You examine the suspect software or card. You take photos of the defective card or CD-ROM. You carefully document the problem and write a report that is forwarded to the manufacturer, dealer, distributor or insurer and request that the responsible party resolve the claim with your client.

Several months later, the other party or the insurer asks for the suspect CD-ROM/card and you can’t find it. You forward all the documentation and other evidence that you have and explain how obvious it is that the software/card was defective. The other side says, “no product, no claim” and now you have a big problem.

The legal issue is called “spoliation of evidence” and it applies to you whether you design, manufacture, sell, distribute or install any product, regardless of whether it is software, hardware or simply service on a computer. The legal doctrine says that if you are the last one known to possess the relevant evidence before it is lost, then it may be presumed that the missing evidence would have implicated you and exonerated the other parties. In other words, case over, you lose. It doesn’t matter what other evidence you have, even if it is photos, documentation or independent expert opinion. As a matter of law, the other side is entitled to examine the allegedly defective item independently and if you have done anything to prevent an independent inspection, then the other side has been irreparably prejudiced. Thus, the legal doctrine has evolved to prevent parties from conveniently “misplacing” relevant evidence. As a result, the doctrine can be used as both a sword and a shield against you even when all the other evidence implicates someone else and exonerates you.

Prevention Of Spoliation of Evidence Can Save Your Business

Whether you are a retailer, manufacturer, distributor or consultant, it is relatively simple for your business to implement policies to prevent the spoliation doctrine from hurting your business. The key is to make your employees, particularly your field personnel, sensitive to the issue of carefully preserving evidence such as defective hardware or software, or even the client’s damaged computer. Implement a corporate policy that requires any defective product to be returned to a designated person within your company. That person should label and store that item in a specified location where it cannot be mistakenly thrown out or used again. If the product is to be shipped to another company, send it certified and registered mail, return receipt requested or by overnight service so that that shipment and change of possession is carefully documented. Require the recipient to sign a receipt. Your corporate policy should also specify that there shall be no testing of the product that might be partially or wholly destructive of the product. These simple steps will protect your company from a well established legal pitfall, and significant liability where your company is not at fault.

Mr. Fogel is an attorney with McMillan, Rather, Bennett & Rigano, P.C., Melville, Long Island, who counsels clients on commercial legal issues including contractual, litigation and insurance disputes. This newsletter is for educational purposes and is not intended to provide legal advice for any particular situation. Email inquiries to rfogel@mrbr.com

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