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Internal Audits May Not Be Precluded from Trial as a Subsequent Remedial Measure

Kenneth Marc Klemm

Internal Audits May Not Be Precluded from Trial as a Subsequent Remedial Measure
Westend61 via Getty Images

The U.S. Court of Appeals for the Fifth Circuit in Novick v. Shipcom Wireless, Incorporated, 946 F.3d 735 (5th Cir. 2020), recently considered the scope of Rule 407 of the Federal Rules of Civil Procedure. In so doing, the court determined that an internal audit suggesting that a company change its classification of certain employees did not represent a subsequent remedial measure. Thus, on appeal from a jury trial, the Fifth Circuit held that the district court did not err in allowing admission of the audit into evidence.

This matter arose from a suit brought by former employees of Shipcom Wireless, Inc. arguing that it had misclassified these employees, which made them exempt from overtime requirements of the Federal Labors Standard Act. After trial, the found the employees to be nonexempt and awarded both actual damages to former employees who had not been reimbursed previously and liquidated damages for unpaid overtime.

Shipcom appealed to the Fifth Circuit and, among other issues, contended that the trial court had erred in allowing an internal audit into evidence. Prior to the suit being filed, Shipcom had undertaken an internal audit to determine whether certain company positions were classified properly. The audit ultimately concluded that certain positions had been improperly classified and, as a result, the company reclassified these positions to entitle the employees to overtime pay.

The appellate court focused on the wording of Rule 407 and specifically indicated the rule to be a measure taken subsequent to “an earlier injury or harm.” After noting its prior construction of “injury or harm” to be narrow, the court stated that “[t]he admission of evidence of changes made merely to improve a product, as distinguished from remedial measures that make an ‘injury or harm less likely to occur,’ is not barred by the rule.” The Fifth Circuit further indicated by example that post-accident investigations and changes to improve a product did not represent subsequent remedial measures (in other words, the actual changes represented the subsequent remedial measures). Comparing the Shipcom internal audit to a suggested change to improve a product, the court specifically held that although the internal audit recommended changes, the audit did not make the “earlier injury or harm less likely to occur” as required by Rule 407. Consequently, the court upheld the district court’s decision to allow the internal audit and related documents into evidence as not meeting the requirements of a subsequent remedial measure.

The Fifth Circuit also considered several other evidentiary arguments under Rules 401 (relevancy), Rule 402 (irrelevant evidence) and Rule 403 (probative value). In doing so, the court held the audit to be relevant to the issue of whether the job descriptions met the classifications made by Shipcom. The court also rejected Shipcom’s argument that the danger of unfair prejudice, confusing the issues or misleading the jury outweighed the probative value of such evidence under Rule 403. Specifically, the Fifth Circuit determined found that the evidence assisted the jury, and the district court did not commit a clear abuse of discretion in admitting it. Hence, the appellate court also upheld the district court’s rulings on these evidentiary arguments.

This ruling highlights the risks of internal audits and investigations being used by opposing parties in litigation. While internal audits and investigations certainly serve a useful role in helping to improve decision-making on products, actions and a host of other activities, the narrow interpretation of Rule 407 by the Fifth Circuit indicates that the activity must make an event or injury “less likely to occur” for it to be considered a subsequent remedial measure. The internal audit in this case did not meet such classification because it only recommended certain actions and left the company to decide whether it would implement these actions.