Terminating Sanctions Spell Defeat Against Trade Secret Thieves Who Failed To Preserve Evidence of Their Wrongdoing
Topics: Non-Compete and Trade Secrets
Employers need to guard against technology and remote work environments that make it increasingly easy to steal confidential trade secret information and data unbeknownst to the employer. Further frustrating prosecution of trade secret cases is the ease with which electronic and paper trails disappear in the time before litigation commences and, even, as in WeRide Corp., et al. v. Kun Huang, et al., Case No. 5:18-cv-07233-EJD, during litigation.
Courts should pay greater attention to the intentional and calculated deletion and spoliation of evidence by former employees and competing companies that would prove, if such evidence still existed, theft and misuse of company trade secrets. The federal court in the Northern District of California meted out justice by ordering terminating sanctions due to the detrimental impact of spoliation on the ability to prosecute claims of misappropriation of trade secrets, unfair competition, and breach of fiduciary duties in an order that was unsealed on April 24, 2020.
The crux of the allegations in WeRide were that Defendant Kun Huang, while working as the Head of Hardware for Plaintiff WeRide, downloaded a large amount of data from WeRide’s private servers to his laptop, transferred it to USB storage devices, and then utilized that data to form a new company and create, in record time, a self-driving car with the same hardware configuration as WeRide’s cars that Huang called AllRide. On April 16, 2020, in the WeRide matter, Judge Edward J. Davila issued an order granting WeRide’s motion for terminating sanctions against Huang, WeRide’s former CEO, Jing Wang, and Wang and Huang’s current company, AllRide, and AllRide’s corporate alter ego, Kazir, Inc. (collectively “Defendants”) due to the Defendants’ spoliation of key evidence in the case.
Judge Davila found that even after a litigation hold and preliminary injunction issued prohibiting the destruction or deletion of files, AllRide admittedly failed to turn off an auto-delete setting on the company’s e-mail server leading to company-wide destruction of e-mails over three months old, eliminating the ability to discover emails from several individuals’ accounts. The Court concluded that not only did the destruction remove weekly progress reports from the engineering team that likely identified particular file names and codes, but also internal email banter among the engineers, executives, or other employees about the development of AllRide’s technology that could have revealed the actual source of the information. Judge Davila concluded that the Defendants “had some notice that the documents were potentially relevant to the litigation before they were destroyed,” and that the failure to turn off the auto-delete setting constituted a “practice of destroying potentially discoverable material [that] shows both willfulness and bad faith.” Judge Davila further concluded that “AllRide’s mass destruction of email has irredeemably prejudiced WeRide’s case against AllRide.”
As a result, Judge Davila concluded that terminating sanctions against all Defendants were proper. And, because WeRide had been deprived of the evidence necessary to prove its case, and AllRide had demonstrated a clear disregard for the court’s previous orders, lesser sanctions would have been futile. Notably, Judge Davila emphasized the fact that an employer will be held responsible for spoliation caused by its employees. Consequently, default was entered against all of the Defendants, and the Defendants were ordered to pay WeRide’s reasonable attorneys’ fees and costs incurred in connection with the sanctions motion, as well as attorneys’ fees related to other discovery issues raised in the case.
If you are involved in potential or pending trade secrets litigation, be sure to take every reasonable precaution to preserve relevant information and evidence, including turning off any auto-delete settings for e-mails and other electronic data or ensuring that such information is preserved in a pristine state for discovery. An employer will be held accountable if its employees spoliate evidence and will be defending itself against a potential terminating sanctions order instead of defending against the merits of the case.