Spoliation by Self-Driving Startup Leads to Terminating Sanctions

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Orrick - Trade Secrets Group

During the course of a trade secrets litigation, neglecting to preserve electronically stored information (“ESI”) may result in a finding of spoliation. In a recent Order issued by Judge Edward Davila (United States District Court, Northern District of California), two startups in the autonomous vehicle industry, WeRide and AllRide, learned that failure to adequately preserve ESI can also lead to terminating sanctions.
 

The dispute between WeRide and AllRide

The origins of the dispute date back to January 2018, when WeRide alleges it removed Jing Wang (“Wang”) as its CEO. Shortly thereafter, Wang founded AllRide and began recruiting WeRide employees to join his new company. One of the employees recruited by Wang, Ken Huang (“Huang”), began working for AllRide while still employed by WeRide and also began soliciting colleagues to leave with him. In July 2018, WeRide discovered Huang’s conduct and promptly terminated his employment.

In November 2018, WeRide filed suit against AllRide, Wang, and Huang (collectively, “Defendants”) in the United States District Court for the Northern District of California alleging a variety of claims, including trade secret misappropriation and tortious interference.

On March 22, 2019, the Court granted WeRide a preliminary injunction (“PI”) against AllRide and Huang. The PI prohibited both parties from destroying or altering any materials related to WeRide’s confidential information or AllRide’s source code, which it allegedly used to develop its own self-driving technology.

On August 16, 2019, the parties were scheduled to appear for a discovery conference to resolve six motions to compel filed by WeRide. The night before the conference, AllRide filed a letter with the Court disclosing that in mid-June 2019, it learned that it failed to disable an auto-delete setting on its email server leading to a company-wide destruction of emails predating mid-March 2019. After a court ordered investigation into extent of the documents destroyed, WeRide moved for sanctions against the Defendants based on the spoliation of evidence.

Judge Davila’s Order

In a 32-page opinion, Judge Davila granted WeRide’s motion and ordered that the Answers filed by AllRide, Wang, and Huang each be stricken and default be entered against all three parties. Judge Davila also ordered that Defendants pay WeRide’s reasonable fees and costs incurred in connection with bringing the motion. In support of these terminating sanctions, Judge Davila’s Order explains why the actions of AllRide, Wang and Huang were so egregious that “[l]esser sanctions would be futile.”

Judge Davila found that AllRide’s “staggering” spoliation of potentially discoverable material demonstrated a willful disregard for both the PI and its obligation to preserve ESI during the course of litigation. Although AllRide admitted that it discovered the auto-delete function was still active in mid-June 2019, AllRide did not inform WeRide or the Court about this mishap until the night before a discovery conference two months later. Moreover, AllRide’s mass destruction of company-wide emails prejudiced WeRide’s ability to establish its claims of trade secret misappropriation.

Similarly, Judge Davila held that Huang willfully violated the PI because he altered data on his AllRide laptop in late March 2019 and also violated his duty to preserve ESI because he destroyed data on his two WeRide issued laptops after he was terminated in July 2018. Notably, Judge Davila explained that the duty to preserve may arise before litigation formally commences “when a party should reasonably know that evidence may be relevant to anticipated litigation.” Here, a reasonable person in Huang’s position would have understood that litigation was foreseeable when he was terminated on July 31, 2018 for soliciting WeRide’s employees to join AllRide.

In addition to the terminating sanctions against AllRide and Huang, Judge Davila held that terminating sanctions were likewise appropriate against Wang because, as AllRide’s CEO, he was in a position of authority and control over AllRide, and therefore, ratified AllRide’s spoliation.

Judge Davila’s Order underscores the importance of preserving ESI for both companies and individuals. As demonstrated by the Order, a disregard for this duty, especially after a PI, may result in the entry of terminating sanctions.

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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