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October 28, 2014 Practice Points

$600 MM Award Based On Sanction Is Confirmed

By D.C. Toedt III

In Seagate Technology LLC vs. Western Digital Corporation, et al., (October 8, 2014), the Minnesota Supreme Court confirmed an arbitral award in excess of $600 million that was based on an arbitrator’s sanction. The case concerned the alleged theft of trade secrets and breach of a non-compete agreement. The facts are as follows.

Dr. Mao, a departing employee of Seagate, went to work for Western Digital, a competitor of Seagate, and allegedly took trade secrets with him. Seagate sued Dr. Mao and Western Digital for theft of trade secrets and for Dr. Mao’s breach of a non-compete agreement. Western Digital and Dr. Mao successfully moved to compel arbitration pursuant to Dr. Mao’s employment agreement with Seagate.

At the arbitration, Dr. Mao claimed that three of Seagate’s alleged trade secrets were in the public domain because he had publicly disclosed the trade secrets in a presentation he had made at a past industry conference. Dr. Mao tried to prove this by introducing into evidence the PowerPoint deck from his conference presentation. Seagate discovered that Dr. Mao had added new slides to his PowerPoint deck and moved for sanctions on grounds that Dr. Mao had fabricated evidence.

As a sanction, the arbitrator precluded Western Digital and Dr. Mao from introducing any evidence in opposition to Seagate’s claims with regard to the three trade secrets that were the subject of the fabricated evidence. After a 34-day hearing, the arbitrator entered a finding of liability as to those three trade secrets and ruled in favor of Western Digital and Dr. Mao on all of the other trade secrets in dispute.

The arbitrator calculated damages of about $525 MM based on the “unjust enrichment” method. With pre-judgment interest, the total award exceeded $600 million. Western Digital and Dr. Mao challenged the award on the grounds that the arbitrator had exceeded his authority by entering the default as a sanction for fabrication of evidence and by refusing to hear evidence on the relevant issues. The district court vacated the award in part in that respect.

The Minnesota Supreme Court reversed, holding that the arbitration agreement and the AAA Employment Rules authorized the arbitrator to enter the punitive sanctions that he did. The court rejected the respondents’ pleas that Dr. Mao’s fabrication of evidence did not warrant the extreme sanction imposed. The court stated, in essence, that the respondents made their bed by requesting arbitration, which was subject only to limited judicial review. The court quoted one of its earlier holdings that “Where the arbitrators are not restricted by the submission to decide according to principles of law, they may make an award according to their own notion of justice without regard to the law.”

Keywords: alternative dispute resolution, litigation, sanction, fabrication, evidence, limited judicial review

D.C. Toedt III is an attorney at the Law Office of D.C. Toedt III in Houston, Texas.

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