Allegations of intentionally purged emails, wiped laptops and servers, and corrupted key source code rarely sink major cases. But Judge Davila of the Northern District of California recently reminded litigants that failure to preserve electronically stored information (“ESI”) can constitute spoliation. And spoliation can lead to terminating sanction.
The case involved a trade secrets dispute between two autonomous vehicle companies, WeRide, and AllRide. WeRide alleged former CEO Jim Wang founded AllRide shortly after being let go in January 2018. He allegedly recruited WeRide employees to AllRide. One employee, Ken Huang, allegedly worked for both companies simultaneously. WeRide alleged that it discovered Huang was soliciting colleagues. It purportedly let him go in July 2018. Four months later, it sued AllRide, Wang, and Huang ( “Defendants”) in the United States District Court for the Northern District of California. The Complaint raised multiple claims. These included trade secrets allegations under the Defend Trade Secrets Act and the California Uniform Trade Secrets Act. There were also claims for defamation and intentional interference with prospective economic advantage.
The court granted WeRide a preliminary injunction against AllRide and Huang in March 2019. The injunction barred all parties from altering materials related to WeRide’s confidential information or AllRide’s source code. The injunction specifically barred the parties from altering or destroying paper or electronic records “related to WeRide’s confidential material or information, or AllRide’s source code.” In August, the night before a discovery conference, AllRide informed the court that it had identified large scale destruction of emails. AllRide attributed the problem to a failure to disable auto-delete on its email server. WeRide accused AllRide of deleting six email accounts. WeRide also presented forensic evidence suggesting that AllRide had modified source code in violation of the injunction. WeRide sought sanctions based on spoliation of evidence.
The court granted WeRide’s motion. It found that AllRide’s spoliation of emails had destroyed any defense. Weekly engineering reports would have been particularly critical. Citing cases from the Seventh Circuit, it adopted a “preponderance of the evidence” standard for terminating sanctions. It found that AllRide had acted in bad faith. Perhaps most critically, the court decided that AllRide’s ESI spoliation was intentional. For that reason, terminating sanctions against AllRide, Wang, and Huang were warranted under Federal Rules of Civil Procedure 37(b) and (e). The court found that the defendants’ actions were sufficiently egregious that lesser sanctions would not suffice. The court held that AllRide’s “staggering” spoliation of potentially discoverable material showed a willful disregard of the injunction, as well as its independent duty to preserve ESI during litigation.
AllRide admitted that it had discovered the auto-delete problem in mid-June 2019. But it had failed to advise either AllRide or the court at the time. The deletion also affected WeRide’s ability to establish its claims of trade secret misappropriation. The court held that Huang violated the injunction, and his litigant duty to preserve ESI by altering data in March 2019.
Judge Davila pointedly observed that the duty to preserve ESI may precede litigation. It begins “when a party should reasonably know that evidence may be relevant to anticipated litigation.” A reasonable person in Huang’s shoes would have appreciated the likelihood of litigation when he was terminated for soliciting WeRide employees. The judge found that Wang was subject to termination sanction as AllRide’s CEO. As the ultimate control authority, he had ratified AllRide’s conduct, specifically violation of the injunction and the spoliation.
The case ultimately settled. Even so, it serves as a sobering reminder to businesses and counsel of the necessity of protecting ESI. Executives, internal, and outside counsel must affirmatively investigate and adjust document retention protocols and auto-delete policies. Deficient retention practices can be a technological landmine as litigation looms. Failure can lead to a loss before the battle is ever joined.