Fabricating Evidence and Losing Arbitration

by McDermott Will & Emery

Seagate Tech., LLC v. W. Digital Corp

Addressing an issue of whether an arbitrator inappropriately sanctioned a party that had been found to have fabricated evidence and whether the arbitrator refused to consider certain evidence, the Minnesota Supreme Court upheld the arbitrator’s sanctions and the $630 million award.  Seagate Tech., LLC v. W. Digital Corp, Case No. A12-1944 (Minn. Supr. Ct., Oct. 8, 2014) (Anderson, J.)  The Court concluded that the arbitrator’s award, which included punitive sanctions, was proper even though it did not give weight to certain evidence presented during the arbitration hearing.

Sining Mao worked for Seagate, designing hard disk drives.  Mao’s employment contract required him to preserve the confidentiality of all trade secrets and included an arbitration clause.  In 2006, Mao left Seagate and began working for Western Digital, a competitor of Seagate.  Seagate subsequently alleged that Western Digital and Mao (collectively WD) misappropriated Seagate’s trade secrets, which Western Digital then used for its own designs.  After Seagate filed suit, WD invoked the arbitration clause of the employment agreement, and the district court stayed the lawsuit.

During the ensuing arbitration proceeding, Seagate brought a motion for sanctions against WD for fabricating evidence.  Seagate alleged that Mao had altered an old PowerPoint presentation to include new slides to make it appear as if the information alleged to be trade secrets had been presented in public.

The arbitrator sanctioned WD for this fabrication by precluding any evidence or defense disputing the validity of the trade secrets or the misappropriation and the use of the trade secrets by WD.  The sanctions also included a judgment against WD of liability for misappropriation of the trade secrets accompanied by an award of $630 million.

WD brought a motion in state court to vacate the award and sanctions, arguing that the arbitrator exceeded his authority by imposing punitive sanctions and had not properly heard all evidence material to the controversy.  After the trial court agreed that the exclusion of evidence by the arbitrator was improper, Seagate appealed.  Seagate argued among other things that the trial court had erred in its determination that the arbitrator had exceeded his authority and that WD, the party that sought arbitration, had not waived its right to challenge the sanctions.  The state court of appeals overturned the trial court’s decision and reinstated the award, concluding that WD had waived its right to challenge the arbitrator’s ability to issue punitive damages.  The case was then heard by the Minnesota Supreme Court.

The Minnesota Supreme Court disagreed that there had been a waiver, but agreed that the arbitrator’s award should be upheld.  As for the waiver issue, the Court found nothing in the statute imposing any requirement that would lead to a waiver.

As for the award, the Court found the arbitrator’s ability to issue punitive sanctions in the arbitration agreement itself, i.e., the controlling document.  The arbitration agreement provided for “injunctions or other relief” or “any remedy or relief that would have been available to the parties had the matter been heard in court.”  In response to WD’s argument that punitive sanctions did not serve as a remedy or relief, the Court explained that in this case, the punitive sanctions were used to redress the wrong of the fabricated evidence.  The Court further concluded that the preclusion of evidence order was proper, as it would have also “been available to parties had the matter been heard in court.”  Finally, the Court made quick work of WD’s argument that the arbitrator violated the requirement to hear material evidence when he issued the preclusion order including punitive sanctions.  The Court found that the evidence was heard by the arbitrator, but the arbitrator merely chose not to factor it into the final award.  The arbitration award was reinstated in full.

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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