Spoliation Instruction But No Terminating Sanctions in Coding Trade Secrets Case

by Cozen O'Connor
Contact

The United States District Court for the Southern District of Texas declined to impose litigation ending discovery sanctions for several claims of spoliation, but does plan to issue a spoliation instruction in Quantlab Technologies Ltd. v. Godlevsky, No. 4:09-cv-4039, 2014 U.S. Dist. LEXIS 20305, filed February 19, 2014.

Plaintiff, Quantlab Technologies Ltd. (“Quantlab”), is a quantitative financial research firm that employed two of the defendants, Dr. Godlevsky and Dr. Kuharsky (“the defendants”), in its research and technology departments.  The defendants wrote algorithms and code that transformed Quantlab from a company on the verge of bankruptcy into a profitable stock trading company.  The defendants were fired from Quantlab in 2007 after they had inquired about the legality of Quantlab’s trading practices.  The defendants then joined a new trading start-up, SXP Analytics, where they also wrote high-frequency trading strategy code to analyze the stock market.  Litigation over whether the defendants were using Quantlab’s trade secrets began in 2007.  The FBI raided SXP Analytics in 2008, seizing hundreds of thousands of files that may have come from Quantlab.  Following the raid, the defendants left SXP Analytics, which was eventually dissolved in 2012. The defendants then attempted to form a new high-frequency trading start-up called Singletick.

The Quantlab trade secret litigation followed the defendants throughout their subsequent career.  Because Quantlab claimed that the defendants relied on its code to develop their own code, Quantlab argued that “each iteration of code written by Defendants since Dr. Kuharsky and Dr. Godlevsky departed from Quantlab’s employ is relevant to determining whether that code was impermissibly based upon Quantlab’s version.”  Id. at *39.  Since litigation had begun as soon as the defendants were terminated and the instant suit was filed in 2009, Quantlab argued that the defendants had had a duty to preserve their computers ever since 2007 and definitely since 2009.

The court took time to set forth the legal standards that apply to issuing discovery sanctions, and then analyzed each claim of spoliation against each defendant individually, reasoning that whether a party has a duty to preserve evidence is a fact specific inquiry.

The first spoliation claim was against SXP Analytics founder, Emmanuel Mamalakis, for wiping and/or giving away 23 computers used by his developers.  The work stations were wiped or given away in 2012 as part of winding up SXP Analytics.  The court found that Mr. Mamalakis had a duty to preserve the work stations even though they had not yet been the subject of a specific discovery request.  Before Mr. Mamalakis got rid of the work stations, he had been served with many Requests for Production.  In light of those, “Mr. Mamalakis should have known that significantly altering or disposing of computers used by SXP employees was unwise.” Id. at *42.  The court rejected Mr. Mamalakis’s arguments that he did not have the requisite state of mind for spoliation because part of his decision to wipe computers was to inexpensively wind up SXP Analytics and that he believed any relevant evidence from the work stations could also be found on the servers, which he kept.  The court found Mr. Mamalakis acted in bad faith “because Mr. Mamalakis intentionally wiped and gave away numerous computers nearly three years after initiation of this lawsuit and concealed it from the court.”  Id. at *48.  The evidence on the workstations was relevant and prejudiced Quantlab because information on the servers would only show the code a developer uploaded to the server and would not contain detailed information about what the developer was looking at when he wrote the code or what versions of the code the developer went through before uploading it to the server.  But the court refused to impose terminating sanctions finding that whether Quantlab would have used evidence from the work stations was still “somewhat speculative” so the evidence was only “moderately relevant” and its loss was only “moderately prejudicial.”  Id. at *53.

The second spoliation claim was against Dr. Godlevsky because when Quantlab requested all computers Dr. Godlevsky had used since 2007, he only provided one laptop.  Quantlab did not allege specific acts of spoliation, but brought a spoliation claim on the theory that “there must be more.”  Id. at *54 [emphasis omitted].  Dr. Godlevsky admitted that he had another personal laptop, which he never used for coding, that he had disposed of after the hard drive had failed and that he had used many USB drives over the years that he did not keep track of.  The court found that Dr. Godlevsky should have known in 2007 that litigation was likely so that he could not be careless with evidence and that he definitely had a duty to preserve since 2011.  Even if Dr. Godlevsky intended to argue that the evidence was not relevant, he still had a duty to preserve it.  The court found that Dr. Godlevsky’s carelessness with his electronic devises constituted bad faith, but not “the most culpable state-of-mind possible.” Id. at *61.  The evidence was likely relevant, especially evidence on devices that had been seized by the FBI and had been connected to computers containing Quantlab code.  But the court declined to impose litigation-ending sanctions because the bad faith was not strong enough.

The third spoliation claim was against Dr. Kuharsky regarding a few specific devices, including one that Dr. Kuharsky had plugged into his computer approximately 50 times.  Dr. Kuharsky admitted that he had a duty to preserve evidence ever since 2007 and the court found bad faith for losing the specific devices.  But like the claims against the other defendants, while the evidence was likely relevant, it was not certain that it would have been used in Quantlab’s case, so prejudice to Quantlab could not be readily determined.  The court determined that loss of the specific devices warranted a spoliation instruction against Dr. Kuharsky, but that there was not a strong enough showing of culpability or prejudice to warrant litigation ending sanctions.

This case serves as a reminder to institute appropriate litigation hold procedures when litigation becomes reasonably likely.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cozen O'Connor | Attorney Advertising

Written by:

Cozen O'Connor
Contact
more
less

Cozen O'Connor on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.