Riptide Autonomous Solutions, LLC v. BAE Sys. Info. & Elec. Sys. Integration Inc.

2025 NY Slip Op 30052(U)

• Court: New York Supreme Court, New York County
• Decided: January 7, 2025
• Docket: Index No. 652078/2022
• Status: Unpublished

Opinion

Riptide Autonomous Solutions, LLC v BAE Sys. Info. & Elec. Sys. Integration Inc. 2025 NY Slip Op 30052(U) January 7, 2025 Supreme Court, New York County Docket Number: Index No. 652078/2022 Judge: Andrea Masley Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [FILED: NEW YORK COUNTY CLERK 01/07/2025 04:57 P~ INDEX NO. 652078/2022 NYSCEF DOC. NO. 262 RECEIVED NYSCEF: 01/07/2025

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 48 -------------------X RIPTIDE AUTONOMOUS SOLUTIONS, LLC, and INDEX NO. 652078/2022 JEFFREY SMITH,

Plaintiffs, MOTION DATE

- V - MOTION SEQ. NO. 017 BAE SYSTEMS INFORMATION AND ELECTRONIC SYSTEMS INTEGRATION INC., DECISION+ ORDER ON MOTION Defendant.

----------------------------X HON. ANDREA MASLEY:

The following e-filed documents, listed by NYSCEF document number (Motion 017) 201, 202, 203, 204, 205,206,207,208,209,210,211,212,213,214,215,216,217,218,219,220,221,222,223,224, 225,226,227,228,229,230,231,232,233,237,238,239,240,241,242,243,244,245,246,257 were read on this motion to/for SANCTIONS

Motion sequence number 017 stems from defendant BAE Systems Information

and Electronic Systems Integration lnc.'s (BAE) deletion of the email accounts of Sarah

Smith and Jeffrey Smith, former employees of plaintiff Riptide Autonomous Solutions,

LLC (Riptide) and BAE.

Riptide moves by order to show cause for an order granting Riptide the following

relief: (i) conclusive spoliation inferences for all identified missing evidence, (ii) a burden

shift requiring BAE to prove that it used commercially reasonable efforts and good faith

in achieving revenue during the earn-out period, and (iii) an inference that all improperly

deleted documents would have supported Riptide's claim that BAE failed to engage in

commercially reasonable efforts and good faith. Counterclaim defendant Jeffrey Smith

joins Riptide's motion. (NYSCEF Doc. No. [NYSCEF] 246, Notice of Joinder.)

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Background

Riptide designed and manufactured unmanned underwater vehicles for defense,

commercial, and research applications. (NYSCEF 1, Complaint ,I 2.) Pursuant to an

April 12, 2019 Asset Purchase Agreement, Riptide sold its operating assets to BAE. (Id.

,I 1.) After the acquisition, Riptide was entitled to three earn-out payments not to

exceed $26 million, which were tied to the revenue from Riptide business and paid

during the earn-out periods of calendar years 2019, 2020, and 2021. (See id. W 5, 18-

20.) Riptide's sole remaining cause of action against BAE is for breach of the APA by

failing to "act in good faith and use commercially reasonable efforts to operate [Riptide]

Business with respect to achieving revenue of Business Products and Services in the

Earn-Out Period." (Id. ,I 63 internal quotation marks and citation omitted]; NYSCEF

118, Decision and Order at 1 [mot. seq. no. 006].) BAE alleges counterclaims against

Riptide and Jeffrey Smith for (i) fraudulent inducement seeking to rescind the APA and

declare the same void ad initio, (ii) fraudulent inducement seeking damages, (iii) breach

of APA/contractual indemnification, and (iv) fraud. (NYSCEF 122, Answer with

Counterclaim at 24 ,I 1, at 31-34 ,r,r 37-60.) The counterclaims are predicated on the

allegation that Riptide and Jeffrey Smith "falsely represented that the Riptide product

functioned at depths of up to 300 meters for more than 30 hours." (Id. at 31 ,I 38; see

id. at 32-34 ,I,I 45, 52, 58.)

Riptide transferred its email accounts, including the Smiths' email account, to

BAE as a result of the acquisition. (NYSCEF 208, Riptide Nov. 19, 2023 email at 2/5.)

BAE deleted the Smiths' Riptide email accounts 180 days after the deal, i.e. around

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December 2019. (See NYSCEF 255, tr at 22:19-23 [oral argument]; NYSCEF 225, tr at

277:4-13 [Jeffrey Smith depo] [stating that deal closed in May 2019].)

Following the acquisition, the Smiths began working for BAE. Jeffrey Smith and

Sarah Smith left BAE in May 2021, and February 2022, respectively. (NYSCEF 230, tr

at 172:12-14 [Sarah Smith depo]; NYSCEF 216, Sarah Smith aff ,i 3.) Pursuant to

BAE's document retention policy, the Smiths' BAE email accounts were disabled upon

their departure from BOO and their emails were purged. BAE's counsel explained that

"Mr. and Mrs. Smith left BAE Systems prior to the legal hold going into effect on March 18, 2022. Pursuant to BAE Systems' document retention policies and procedures, departing employees' accounts are disabled on the day of their departure and associated documents (including emails) that are not either designated as a company record or subject to a legal hold are reset from a 180- day to a 0-day purge status. Once purged, the emails and the account are not recoverable. BAE Systems complied with that policy when both Mr. and Mrs. Smith left BAE Systems. Consequently, BAE Systems cannot produce their PST files." (NYSCEF 209, Gregory M. Williams 1 Dec. 29, 2023 email at 2-3/5.) 2

BAE put the litigation hold in place on March 18, 2022. (Id. at 2/5.) Riptide

initiated this action on May 4, 2022. (NYSCEF 1, Complaint.)

Discussion

Timeliness

As early as August 8, 2023, Riptide learned that the Smiths' email accounts were

deleted. (See NYSCEF 209, Williams Dec. 29, 2023 email at 3/5.) On September 12,

1Williams is BAE's counsel. (NYSCEF 222, Williams aff ,i 1.) 2Despite lack of clarity in Riptide's papers, the court assumes that this motion is based on deletion of the Smiths' Riptide and BAE email accounts. The Riptide email accounts, however, were deleted around December 2019 (see supra at 2-3), i.e. prior to the November 20, 2020 date when Riptide argues the duty to preserve attached. Additionally, in its reply brief, Riptide alleges for the first time deletion of email accounts of certain additional BAE employees which is not before the court since you cannot raise issues for the first time on reply. (NYSCEF 237, Reply Brief at 4/18 n 2.)

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2023, the court ordered that any discovery motions shall be filed immediately, otherwise

waived. (See NYSCEF 143, Amended PC Order ,i 6.) This motion was filed on June

17, 2024. (See NYSCEF 201, Proposed OSC [mot. seq. no. 017].) The court rejects

BAE's argument that this motion should be denied as untimely. This is not a discovery

motion that could have been filed immediately; more productions by BAE followed in

2023. (See NYSCEF 210 & 211, email chains.) Indeed, Riptide explains that it "was

waiting to see if later productions or alternative sources would cure the loss of these e-

mail accounts" and "refrained from wasting the Court's time and resources until it was

certain that these items were indeed missing." (NYSCEF 237, Reply Brief at 15-16/18.)

Spoliation

"Under the common-law doctrine of spoliation, when a party negligently loses or

intentionally destroys key evidence, the responsible party may be sanctioned under

CPLR 3126." (Delmur, Inc. v School Constr. Auth., 174 AD3d 784, 786 [2nd Dept 2019]

[internal quotation marks and citations omitted].)

"A party that seeks sanctions for spoliation of evidence must show [1] that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, [2] that the evidence was destroyed with a culpable state of mind, and [3] that the destroyed evidence was relevant to the party's claim or defense such that the trier of fact could find that the evidence would support that claim or defense." (Pegasus Aviation I, Inc. v Varig Logistica S.A., 26 NY3d 543, 547 [2015] [internal quotation marks and citations omitted].)

An obligation to preserve relevant evidence arises when a party reasonably

anticipates litigation, that is, when a party "is on notice of a credible probability that it will

become involved in litigation, seriously contemplates initiating litigation, or when it takes

specific actions to commence litigation." (VOOM HD Holdings LLC v Echostar Satellite

L.L.C., 93 AD3d 33, 43 [1st Dept 2012] [internal quotation marks and citation omitted].)

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In the commercial context, notice of a credible probability of litigation has been found

where a party repeatedly threatens to terminate an agreement and transmits numerous

breach letters. (See id. at 43.) A duty to preserve has also been found to have been

triggered when a party notified an adversary that the party would consult legal counsel

and consider commencing litigation. (See Ocwen Loan Servicing, LLC v Ohio Pub.

Employees Retirement Sys., 49 Misc 3d 1219[A], 2015 NY Slip Op 51775[U], *6 [Sup

Ct, NY County 2015].)

Duty to Preserve

Riptide argues that BAE's duty to preserve was triggered when BAE sent the

November 30, 2020 Notice of Indemnification to Riptide.

As stated on the record on July 25, 2024, this argument is rejected. (NYSCEF

255, tr at 41 :11 :17 [oral argument].) First, the indemnification letter alleges

misrepresentations by Riptide and relate to the portion of the purchase price held in

escrow in order to cover potential losses related to breaches. (See NYSCEF 204, Nov.

30, 2020 Letter and Indemnification Claim.) Riptide's allegations in its breach of the

APA cause of action are on a different subject, i.e. that BAE failed to use commercially

reasonable efforts to operate the Riptide business post-acquisition leading to reduced

earn-out payments to Riptide. (See e.g. NYSCEF 1, Complaint ,i 63.) The November

30, 2020 letter and indemnification claim could not have triggered BAE's obligations to

preserve evidence in anticipation of Riptide's claims for breach of the APA (See World

Trade Centers Assn., Inc. v Port Auth. of New York and New Jersey, 2018 WL

1989616, *5, 2018 US Dist LEXIS 56894, *13 [SD NY, Apr. 2, 2018, No.

15CIV7411 LTSRWL] [stating that although plaintiff "had a duty to preserve evidence

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related to [another] dispute" between parties since June 2011, "that duty did not extend

to the trademark dispute at issue here" where the duty to preserve was triggered in

January 2012 (citation omitted)], report and recommendation adopted sub nom. World

Trade Centers Assn. v Port Auth. of New York and New Jersey, 2018 WL 1989556,

2018 US Dist LEXIS 69668 [SD NY, Apr. 25, 2018, No. 15 CV 7411-LTS-RWL]; Voom

HD Holdings, LLC v Echostar Satellite, L.L.C., 2010 NY Slip Op 33759[U], *24 [Sup Ct,

NY County 201 O] ["Typically, the duty to preserve evidence attaches as of the date the

action is initiated or when a party knows or should know that the evidence may be·

relevant to future litigation" (emphasis added; internal quotation marks and citations

omitted)], affd 93 AD3d 33 [1st Dept 2012]; see also Zubulake v UBS Warburg LLC, 220

FRO 212, 218 [SD NY 2003] ["The duty also extends to information ... which is 'relevant

to the subject matter involved in the action"' (quoting Fed Rules Civ Pro rule 26 [b][1])].)

Second, even if the November 30, 2020 communication could trigger the duty to

preserve in relation to Riptide's claim, as Riptide argues, on December 21, 2020, BAE

sent a letter informing that it elected to release the escrow funds "in order to focus the

entire BAE Systems team, including our heritage Riptide employees, on resolving these

issues and mitigating the resulting damages." (NYSCEF 206, Dec. 21, 2020 letter.)

This letter evidences BAE's intention not to litigate.

The argument that BAE's counterclaims invoke the misrepresentation that were

alleged in the November 30, 2020 letter and indemnification claim is unavailing. That

BAE eventually asserted the counterclaims alleging such misrepresentations in

February 2023 does not demonstrate that BAE seriously contemplated initiating

litigation in the fall of 2020. Indeed, the record does not support such a conclusion.

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Additionally, Riptide fails to explain how the deletion of the Smiths' email account

impairs Riptide's defense of the counterclaims. Indeed, Sarah Smith only recalls one

specific email by a BAE "apologizing ... for the way that BAE mishandled the Riptide

business," which is irrelevant to the defense of the counterclaims. (NYSCEF 216,

Sarah Smith aff ,i 8; see id. ,i 9.) 3 Neither does Riptide seek any specific sanctions in

relation to such defense. Instead, Riptide seeks burden shifting and inference sanctions

solely in relation to its breach of APA claim.

Alternatively, Riptide argues that Jeffrey Smith's December 22, 2020 email

triggered the duty to preserve. The email was sent in the context of an internal BAE

discussion as to how to respond to a customer inquiry regarding pricing on a Riptide

product. A BAE employee proposed to respond that "we are booked for most of 2021"

and new orders for 2022 will be accepted in May or June of 2021 "[r]ather than saying

we are not currently selling and are in re-design mode." (NYSCEF 239, email chain at

3/4.) Jeffrey Smith responded on December 22, 2020:

"Riptide shareholders have a multi-year earn out based on revenue on the acquisition that requires that BAE Systems sells vehicles and acts in good faith to maximize that revenue. Halting quotes and thereby sales and revenue, violates the good faith terms of the acquisition agreement. In my opinion, so does pulling out of the commercial model given BAE's assurances that they would maintain the commercial model at the time of sale. This is my comment. It is not from the Riptide attorney. I'd suggest this decision be reassessed quickly in light of the acquisition agreement which you may not be fully aware of." (Id. at 2/4.)

This email is insufficient to put BAE on notice of Riptide's potential litigation;

there is no threat of litigation. (Cf. Karsch v Blink Health Ltd., 2019 WL 2708125, *2, 18,

2019 US Dist LEXIS 106971, *4, 48-49 [SD NY, June 20, 2019, No. 17CV3880VMBCM]

3As to Jeffrey Smith's emails, Riptide proffers no evidence in form of an affidavit or otherwise explaining relevance of his deleted emails.

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[duty to preserve triggered when plaintiff's attorney sent letter to defendants counsel

accusing accused defendants of securities fraud, common law fraud, breach of fiduciary

duty, and breach of contract and threatening litigation unless defendants reconsidered

their course of action].) Indeed, as discussed infra, the record demonstrates that the

parties remained in negotiations regarding the earn-out payments to Riptide until the

end of 2021, the last year of the earn-out period, and the litigation was not initiated until

May 2022. "[T]he mere existence of a dispute" which may be evidenced by the

December 22, 2020 email does "not mean that the parties should reasonably have

anticipated litigation at that time and taken steps to preserve evidence." (Treppel v

Biovail Corp., 233 FRO 363, 371 [SD NY 2006].)

Riptide next argues that BAE's duty to preserve was triggered by BAE's October

28, 2021 letter.

This argument is likewise rejected. In its October 13, 2020 email, Riptide raised

an issue of extending the three-year earn-out period due to "[d]elays and financial

impacts due to COVID-19," "[i]ntegration and implementation of BAE Systems process

and policies," "[d]elays in providing vehicle quotes to customers," and "[d]elays in

moving to a new manufacturing facility." (NYSCEF 212, email chain at 5-6/6.) In the

October 28, 2021 letter, BAE stated that it "would like to make an offer in good faith to

the Board of Managers in an effort to close out this matter without further extending the

earn-out period." (NYSCEF 213, BAE Oct. 28, 2021 letter at 1.) BAE offered to

recognize for the purposes of calculating the 2021 earn-out payment certain revenue

that was delayed. (Id.) Riptide responded on November 24, 2022, that the offer "is

perceived as a sincere effort to try to address what [the Riptide] stakeholders view as

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some concerning issues with the situation" and offered a number of arguments in

support of its request that "BAE fulfill the whole of the earnout. While there may be

room for some creative ways to fulfil this with some delay to allow payment flexibility,

this is Riptide's considered request." (NYSCEF 214, email chain at 4-5/5.) This

correspondence shows that "[r]ather than threatening impending litigation," the parties

continue to be "willing to explore a negotiated resolution"; in such circumstances

litigation is not reasonably anticipated. (Cache La Poudre Feeds, LLC v Land O'Lakes,

Inc., 244 FRO 614, 622 [O Colo] [collecting cases].)

Although BAE emails sent shortly thereafter indicate that two BAE employees

contemplated that "[t]here may be a legal action coming or at least shenanigans related

to Riptide" (see NYSCEF 215, email chain at 2/5), "[m]erely because one or two

employees contemplate the possibility [of a lawsuit] does not generally impose a firm-

wide duty to preserve." (Zubulake, 220 FRO at 217.) 4

Culpable State of Mind; Relevance

As Riptide has failed to establish that BAE was under a duty to preserve

evidence when the Smiths' email accounts were deleted, the court need not consider

the balance of parties' arguments.

Even if a duty to preserve was triggered prior to the date when the email

accounts were deleted, Riptide fails to show that BAE acted with gross negligence.

4 At oral argument, BAE's attorney explained that the litigation hold was eventually implemented on March 18, 2022, because "[t]he parties were discussing a potential extension of the earn-out provision, and those discussions looked like they weren't going well. At that point -- and they had gone fine beforehand and had not been contentious .... When they heated up in early 2022 and it started to go badly, BAE following its obligations said, [w]e're going to be conservative. They haven't filed a

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Riptide relies solely on BAE's failure to institute a litigation hold which does "not amount

to gross negligence per se," but is only one factor to be considered in determining the

spoliator's state of mind. (Pegasus Aviation I, Inc., 26 NY3d at 553.) Without more, a

failure to institute a litigation hold and deletion of emails pursuant to the document

retention policy, as happened here, would amount only to simple negligence. (See SM

v Plainedge Union Free Sch. Dist., 162 AD3d 814, 816, 818-19 [2d Dept 2018] ["The

defendant acted negligently in unilaterally deciding to preserve only 24 seconds of

footage and passively permitting the destruction of the remaining footage" which "was

automatically erased 30 days after the accident" "[i]n keeping with the defendant's usual

custom and practice"]; TIAA Global lnvs. LLC v One Astoria Sq. LLC, 2016 NY Slip Op

31240[U], *8 [Sup Ct, NY County 2016] [finding simple negligence where defendants

failed to institute litigation hold and deleted emails in normal course of business].) "[l]f

the evidence is determined to have been negligently destroyed, the party seeking

spoliation sanctions must establish that the destroyed documents were relevant to the

party's claim or defense." (Pegasus Aviation I, Inc., 26 NY3d at 547-48.) Riptide

complaint yet but, we're instituting a hold." (NYSCEF 255, tr at 40:22-41 :6 oral argument].)

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proffers no evidence of relevance of Jeffrey Smith's emails in the form of an affidavit or

otherwise.

Accordingly, it is

ORDERED that the motion is denied; and it is further

ORDERED that summary judgment motions, if any, shall be filed within 30 days

of the date of this decision and order. (See NYSCEF 258, Sep. 2, 2024 Order.)

1/7/2025 DATE ANDREA MASLEY, J.S.C.

~ CHECK ONE: CASE DISPOSED NON-FINAL DISPOSITION

APPLICATION:

CHECK IF APPROPRIATE: GRANTED

SETTLE ORDER 0 DENIED

INCLUDES TRANSFER/REASSIGN 8GRANTED IN PART

SUBMIT ORDER

FIDUCIARY APPOINTMENT □ OTHER

□ REFERENCE

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