A Cautionary Trade Secrets Tale: Failure To Preserve Potentially Relevant Evidence

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Sheppard Mullin Richter & Hampton LLPHere, we provide a cautionary tale of what can happen to a business that fails to preserve documents that are potentially relevant evidence to pending or threatened trade secrets litigation, and offer some takeaways for businesses that would like to avoid such dire straits.[1]

The consequences for spoliation of potentially relevant evidence can range from monetary sanctions, to the exclusion of evidence at trial, adverse jury instructions, and even terminating sanctions.[2]  Spoliation claims are frequently made in trade secret cases.[3]  WeRide Corp. v. Kun Huang, No. 5:18-CV-07233-EJD, 2020 WL 1967209 (N.D. Cal. Apr. 24, 2020) is the latest example, and serves as a warning to potential litigants of how severe the consequences of spoliation can be.  There, the court ordered the defendants’ default be entered as a sanction for their spoliation of potential evidence both after and before the litigation was filed.  The spoliation included not only affirmative destruction of evidence but also a failure to take proactive measures to preserve evidence.

The default likely will have substantial economic consequences for defendants since they cannot defend against plaintiff WeRide’s complaint which seeks $249 million in punitive damages in addition to a permanent injunction requiring defendants to refrain from utilizing WeRide’s confidential information.  In addition to the default, the court ordered defendants to pay WeRide its attorneys’ fees and costs incurred in connection with their spoliation and WeRide’s motion.  WeRide recently filed a request for almost $2 million as its attorneys’ fees and costs.

Overview Of The Lawsuit:

WeRide sued its former executives in 2018 for misappropriating its source code to form a competing entity named AllRide AI, Inc. (“AllRide”) that developed an autonomous car (similar to WeRide’s) for the Chinese market.  WeRide alleges that the hardware of AllRide’s car was similar to the configuration of WeRide’s cars, and accused its former CEO and former hardware engineer of downloading its trade secret source code before joining AllRide.  The court granted WeRide’s request for a preliminary injunction which expressly prohibited AllRide from destroying, concealing, disposing, deleting, removing or altering any evidence.

The Court’s Reasoning:

The court granted plaintiff WeRide’s motion for sanctions based on evidence that defendants purged emails and wiped laptops and servers before and during the litigation.  In granting the motion, the court found “sweeping” evidence of AllRide’s “disturbing pattern of destroying discoverable material” that began before the litigation was filed and continued thereafter, including after issuance of the preliminary injunction prohibiting spoliation of evidence.  Specifically, the court cited to AllRide failure to deactivate its company-wide policy of auto-deleting emails older than 90 days, and AllRide’s deletion of email accounts and laptop hard drives.  The court viewed AllRide’s spoliation as willful and in bad faith, reasoning WeRide’s filings in the litigation specifically laid out the relevance of AllRide’s internal emails to WeRide’s claims.

In opposition to the sanctions motion, AllRide argued that the alleged spoliation did not prejudice WeRide because they produced their 2018 source code.  In particular, AllRide argued that the two companies can simply compare WeRide’s alleged trade secrets to the source code AllRide produced to determine liability.  The court rejected this argument, reasoning that AllRide’s acts of spoliation raise questions as to the actual authenticity of the source code that was produced.  The court found that without AllRide’s internal emails, WeRide had no method of testing AllRide’s claim that the 2018 source code was authentic; because of AllRide’s “mass spoliation,” WeRide could not test whether the 2018 source code was inconsistent with the destroyed documents.

In awarding sanctions against the individual defendants, the court reasoned that a CEO can be personally responsible for spoliation committed by its employer, and that an employer can similarly be responsible for the spoliation of its employee under general principles of agency law.  The court reasoned that the individual defendants knew, knew of, or had reason to know of AllRide’s spoliation because they were in “a position of authority and or control.”

Although entry of default against defendants would mean WeRide would prevail on its claims without it having to satisfy the difficult burden of actually proving each element of its claims, the court declined to impose lesser sanctions.  The court reasoned that adverse jury instructions[4] were “too mild and vague” to sufficiently cure the prejudice to WeRide because the spoliation essentially deprived WeRide of the evidence it needed to prove their case.

Takeaways:

Businesses should consider with their counsel potential measures that may allow them to avoid ending up like the AllRide defendants.  To that end, we offer the following takeaways from the WeRide case.

  • The WeRide case illustrates the importance of taking proactive steps to preserve potentially relevant evidence as soon as litigation is reasonably believed to be on the horizon. Delaying these efforts until the actual complaint is served may result in unintended spoliation that cannot be reversed.
  • Businesses should incorporate into their data deletion and archiving policies (if any) directives to follow when litigation is reasonably believed to be on the horizon, including confirmation that a litigation hold instruction[5] trumps deletion and archiving programs/policies. They should also address how to implement a litigation hold instruction when received, such as changes to the deletion/archiving programs/policies to accommodate a litigation hold.
  • Businesses should not assume that they will be able to avoid sanctions if they can offer other evidence relating to the destroyed documents (e.g., the litigant offers the final report but not the emails that led up to the report because the litigant destroyed the emails). A court with a sanctions motion before it may consider whether the spoliation has compromised the movant’s ability to prove its case and attack the non-movant’s evidence.
  • If spoliation does occur (e.g., a litigant inadvertently fails to disable an automatic deletion/archiving program), the litigant should not misstate that no spoliation occurred or otherwise try to conceal the incident from opposing parties or the court. Forcing the opposing parties to prove spoliation likely will require the opposing parties to incur attorneys’ fees and costs that increase the sanctions award.  In addition, concealment may overshadow any other mitigating factors that could have potentially persuaded the court to award lesser sanctions.  For example, if a “cover up” of spoliation comes to light, it may persuade the court that inadvertent spoliation was actually intentional.
  • The WeRide case also serves as an important reminder that (i) high level employees can be held liable for spoliation conduct of their employer and (ii) an employer can be held liable for spoliation conduct of its employees. Thus, employers should educate employees regarding their duty to preserve evidence, as well as the consequences of spoliation and/or concealment, including potential personal liability on their part.  Employees should be encouraged to alert the company about perceived spoliation so that the concern may be timely and efficiently addressed by the employer in consultation with counsel.  Employees should be encouraged to contact the company’s in house counsel about their concerns (rather than non-attorney employees) so that the company can assert in litigation that such communications are privileged from discovery.

Conclusion:

The WeRide case is an excellent illustration of devasting sanctions that can occur from spoliation of evidence during litigation and even before litigation is filed.  Businesses should consider taking proactive steps to avoid ending up like the AllRide defendants.

FOOTNOTES

[1] See https://www.intellectualpropertylawblog.com/archives/spoliation-sanctions-trade-secret-misappropriation for a  few key steps that can be taken in furtherance of avoiding spoliation of evidence, including ESI.

[2] See, e.g., id.

[3] See, e.g., id.

[4] E.g., the court instructs the jury that defendants destroyed documents which the jury may presume would have been unfavorable to defendants if the jury could have been able to view the documents.

[5] A “litigation hold” directs potential custodians of potentially relevant evidence that they are to preserve (not delete or discard) until further notice the categories of documents and things that are identified in the litigation hold instruction.

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.

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