June 26, 2020 Practice Points

When ESI Spoliation May Lead to Termination

Litigators and clients should seek to avoid even facing the prospect of terminating sanctions, let alone their application.

By Aaron Dilbeck

What must a party do to be subject to terminating sanctions—also called “death penalty sanctions”—due to spoliation of evidence? While such sanctions are rare, WeRide Corp. v. Huang, No. 5:18-cv-07233-EJD, 2020 WL 1967209 [2020 U.S. Dist. LEXIS 72738] (N.D. Cal. Apr. 24, 2020) recently discussed the extreme circumstances that may lead to the imposition of death-penalty sanctions.

WeRide’s former CEO, Jing Wang, worked for AllRide enterprises to develop competing technology for self-driving, autonomous cars. Wang recruited WeRide’s head of hardware technology, Kun Huang, who solicited other WeRide employees. Before leaving WeRide, Huang researched penalties for soliciting employees.

Ultimately, in November 2018, WeRide filed suit against Wang, Huang, and AllRide for, among other things, misappropriation of trade secrets. In March 2019, the court granted a preliminary injunction against the defendants, which enjoined them from destroying information. Discovery disputes resulted in the appointment of a neutral forensic inspector and WeRide moved for terminating sanctions for what was, at bottom, spoliation of evidence:

  • AllRide failed to change its email settings that auto-deleted emails after 90 days and did not notify the court of this issue until August 2019.
  • AllRide destroyed email accounts: (i) one of Huang’s before the lawsuit was filed; (ii) two of Wang’s after the lawsuit was filed; (iii) one for Wang’s wife after the preliminary injunction; and (iv) two others at an unknown time.
  • AllRide failed to produce various versions of source code and deleted a source-code file after the preliminary injunction.
  • Huang modified source code files after the preliminary injunction.
  • Huang wiped his two WeRide laptops after researching the consequences of solicitation, sold his personal computer when Wang received a cease-and-desist letter, and lost two flash drives he used at WeRide.
  • AllRide wiped two former employees’ laptops after the lawsuit was filed.
  • AllRide began using ephemeral messaging—messages automatically delete when read—for its internal correspondence after the preliminary injunction.

Considering these facts together, the court awarded default judgments against defendants under Federal Rule of Civil Procedure (FRCP) 37(b) & 37(e). The two standards are distinct. Under FRCP 37(b), the court requires willfulness, fault, or bad faith, in conjunction with a five-factor test considering the impact on/of:

  1. expeditious resolution of litigation;
  2. the court’s ability to manage its dockets;
  3. prejudice to party seeking sanctions;
  4. policy favoring merits based resolution; and
  5. lesser sanctions.

Id. at *8 (citing Leon v. IDX Sys. Corp., 464 F.3d 951 (9th Cir. 2006)). In contrast, under FRCP 37(e), the court requires intent to deprive another party from using information, as well as the impact of the spoliation, in conjunction with a three-factor test asking whether:

  1. Electronically stored information (ESI) should have been preserved;
  2. ESI loss caused by failure reasonably preserve it; and
  3. ESI cannot be recovered through additional discovery.

Id. at *9 (citing Porter v. City & Cty. of San Francisco, Case No. 16-cv-03771, 2018 WL 4215602 (N.D. Cal. Sept. 5, 2018) and FRCP 37(e)).

Applying these standards, the court held that AllRide destroyed potentially discoverable material willfully and in bad faith by leaving the auto-deletion settings in place, using ephemeral messaging, destroying email accounts, and wiping former employees’ laptops. Although it refused to find that AllRide spoliated source code, the court held that the missing source code made the mass spoliation of internal emails and accounts highly prejudicial. As a result, the court granted terminating sanctions against AllRide under Rule 37(b). Further, the court granted terminating sanctions against AllRide under Rule 37(e) because AllRide could only recover a small number of intact emails.

The court granted terminating sanctions against Wang because it found that AllRide was Wang’s agent. The court declined consideration of other bases for such sanctions against Wang.

Finally, the court granted terminating sanctions against Huang under Rule 37(b) because he spoliated source code after the preliminary injunction. It also granted terminating sanctions against Huang under Rule 37(e) because he intended to deprive WeRide of (a) the data on his laptops despite litigation being foreseeable, as evidenced by his internet searches, and (b) source code despite the preliminary injunction.

Takeaways

Litigators and clients should seek to avoid even facing the prospect of terminating sanctions, let alone their application. And to that end, WeRide offers a few key takeaways that litigators should include in their legal-hold notices:

  • to turn off auto-deletion settings;
  • to not delete pertinent email accounts and data;
  • that accounts for pertinent external flash or hard drives; and
  • to not wipe pertinent computers

Aaron Dilbeck is an attorney with Munck Wilson Mandala LLP in Dallas, Texas.


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