Substantial Spoliation Leads to Significant Sanctions

Federal Rule of Civil Procedure 37(e) was amended in December 2015 in an attempt to increase the consistency and predictability with which sanctions for the spoliation of electronically-stored information (ESI) were applied.  Since those amendments, numerous cases have explored the application of the amended rule to different fact sets and have wrestled with questions regarding reasonable steps, intent to deprive, inherent authority, and other issues.  Several of these issues were recently explored again in the WeRide case.

WeRide Background

In the case of WeRide Corp., et al. v. Kun Huang, et al., 2020 WL 1967209 (N.D. Cal. Apr. 24, 2020), the plaintiffs brought suit against some former employees and the competitor, AllRide, for which those former employees went to work, alleging trade secret misappropriation, breach of contract, breach of fiduciary duty, defamation, and other related federal and state claims.  The plaintiffs initially raised these issues in cease-and-desist letters sent in October and November 2018 and then filed their initial complaint late in November 2018.

In December 2018, the plaintiffs sought a preliminary injunction that included prohibitions on the destruction of relevant materials and orders to provide certain discovery.  The preliminary injunction was granted in March 2019, and it:

. . . specifically prohibited the enjoined parties from “[d]estroying, concealing, disposing, deleting, removing or altering any and all documentation of any kind, whether paper or electronic, . . . data, drafts or other things or materials” that are related to WeRide’s confidential material or information, or AllRide’s source code.  The Court also ordered Huang to make several devices, including his AllRide-issued laptop, available for inspection by WeRide.  The Court allowed WeRide to take discovery from AllRide and Huang, and for the parties to take discovery of each other’s source code.  [emphasis added; internal citations omitted]

As late as July 2019, “AllRide represented to the Court that ‘counsel for AllRide and ZZX has discussed with its clients document retention obligations and hired both an outside consultant to assist in the acquisition of electronically stored information’” [emphasis added].

The Spoliation

Despite the complaint, the injunction, and the representation to the Court, in August 2019 – the night before a hearing regarding several disputes, AllRide revealed:

. . . that in mid-June 2019 it became aware that it had not turned off an auto-delete setting on the company’s email server leading to the company-wide destruction of emails predating the middle of March 2019, and separately that several individual email accounts associated with Wang and his wife had been destroyed.  The auto-delete function destroyed emails more than three months old.  [emphasis added; internal citations omitted]

As a result of these revelations, “a neutral forensic inspector” was appointed to investigate, and an expanded preliminary injunction was issued covering additional individuals and ordering additional discovery.

In October 2019, the plaintiffs filed a motion for sanctions “through Federal Rule of Civil Procedure 37(b), Federal Rule of Civil Procedure 37(e), and the Court’s inherent power.”  The motion alleged a range of spoliation by the defendants:

• Email Spoliation
  • AllRide has repeatedly and in violation of its duty to preserve and this Court’s preliminary injunction destroyed emails and other files. AllRide concedes this.  AllRide has destroyed email in two ways: (1) by setting its email servers to automatically delete all emails older than 90 days and maintaining that setting despite knowledge that litigation was imminent, despite receiving the complaint, and despite this Court’s March 22, 2019 preliminary injunction, and (2) by repeatedly destroying email accounts belonging to certain individuals after the original complaint was filed and after the preliminary injunction issued.  [emphasis added]

• Source Code Spoliation
  • WeRide argues that AllRide and/or Huang have spoliated, or otherwise failed to produce, five categories of source code . . . . [emphasis added]

• Other Spoliation
  • Not including the emails and source code discussed above, WeRide alleges that Defendants have each destroyed other potentially discoverable material. Beginning with Huang, he admits to destroying Electronically Stored Information (“ESI”) on three computers . . . .  [emphasis added]

A hearing on this motion for sanctions was eventually held in February 2020, and a decision and order was issued at the end of March.

The Court’s Analysis

In its analysis, the Court found the defendants’ preservation and discovery failures to be egregious enough to warrant both an award of fees and costs and the imposition of terminating sanctions, striking the defendants’ answers and entering defaults against them:

The amount of spoliation that AllRide concedes is staggering.  AllRide admits that it kept its company-wide policy of deleting from its server all emails older than 90 days until months after the preliminary injunction issued, that it deleted the jing[] email account after the original complaint was filed, that it deleted the jack[] email account after the complaint was filed, that it deleted the rongrong[] email account after the preliminary injunction issued, that it deleted Wu Wei and Dongxiang Xu’s email accounts and wiped their laptops after the complaint was filed, that it did not end its policies of deleting the email accounts and wiping the computers of former employees when they leave AllRide until months after the preliminary injunction issued, and that its employees began communicating with DingTalk’s ephemeral messaging feature after the preliminary injunction issued.  Based on these undisputed facts, the Court finds it appropriate to issue terminating sanctions.  [emphasis added]

In reaching this conclusion, the Court performed a full analysis under both FRCP 37(b) and FRCP 37(e), finding sufficient grounds under both and noting that “[t]he case against AllRide is even more damning under Rule 37(e).”

In its analysis, the Court touched on the recurring spoliation sanction questions of intent to deprive and inherent authority.  With regard to intent to deprive, the Court expressed a willingness to infer intentionality from the egregiousness of the preservation failures, even without the direct evidence of intentionality some courts have required:

AllRide’s conduct shows a disturbing pattern of destroying discoverable material that began with the company’s founding and continued not only through the commencement of this litigation but past the preliminary injunction as well.  The Court finds that the totality of the circumstances indicate that AllRide’s spoliation was intentional.  [emphasis added]

With regard to inherent authority, the Court found it “need not consider” the question, since it concluded it could proceed under both FRCP 37(b) and (e).

The defendants attempted to argue for lesser sanctions, such as adverse inference jury instructions, but the Court was unpersuaded, concluding that “AllRide’s destruction of evidence was so sweeping that this case cannot be resolved on its merits” [emphasis added].