As previously noted in this forum: “[p]reservation of electronically stored evidence (ESI) may be critical in trade secret cases.” See 3 Steps in Furtherance of Avoiding Devastating Spoliation Sanctions in Trade Secrets Misappropriation Litigation. This is true for both plaintiffs and defendants, as the fate of modern trade secrets claims regularly turns on the existence or absence of a digital trail left by the accused appropriator. Given the often transitory nature of this evidence, potential litigants must carefully and proactively preserve it in order to mount an effective case or defense. This is especially true for early-stage entities with limited resources, as the “consequences for spoliation of electronically stored information may be severe” – including case terminating sanctions that may be devastating to such an entity’s continued operation. See id.
These prescriptions played out colorfully in the Northern District of California’s recent order in WeRide Corp. v. Huang, et al., Case No. 5:18-cv-07233-EJD, 2020 WL 1967209 (N.D. Cal. Apr. 16, 2020). As detailed below, defendants’ fate turned entirely on their ESI preservation – or lack thereof – resulting in case-terminating sanctions against them for failing suspend their email deletion protocols and allowing ongoing destruction through the litigation, WeRide should serve as a cautionary tale for all companies, both start-ups and large, to take ESI preservation seriously.
In WeRide, the plaintiff alleged that a number of parties conspired to misappropriate trade secrets related to WeRide’s self-driving car technologies. The defendants included WeRide’s former CEO (Jing Wang), its former head of hardware (Huang), and their then-current company, AllRide. WeRide’s trade secret claims were brought under both the federal Defend Trade Secrets Act (18 U.S.C. § 1836) and the California Uniform Trade Secrets Act (Cal. Civ. Code §§ 3426, et seq.).
According to WeRide, after Wang was terminated, he founded AllRide to compete with WeRide and proceeded to disparage his former employer to its current and potential investors (in alleged violation of his separation agreement). See 2020 WL 1967209, at *1. Wang then convinced Huang to defect to AllRide. Id. at *2. After agreeing to join AllRide, Huang allegedly “downloaded an unusually large amount of data from WeRide’s servers,” which he transferred onto a USB device and took with him to AllRide. Id. Huang wiped his WeRide computers before returning them upon his departure. Id. Importantly, WeRide was able to demonstrate that Huang had performed these activities through its forensic analysis of the computers and other hardware that Huang surrendered to WeRide. Id. at *2, 4. Presumably, had WeRide repurposed these devices (as many growth-stage companies do), they may not have recovered this evidence.
On the other hand, the Court found that the defendants had presided over a “staggering” amount of spoliation of ESI – in some cases, intentionally – both before and during the pendency of the lawsuit. As summarized by the Court, “AllRide admits that it kept its company-wide policy of deleting from its server all emails older than 90 days until months after [a] preliminary injunction issued [enjoining the destruction of relevant documents and ESI],” deleted a number of relevant email accounts and wiped the computers of potential witnesses, destroyed or modified numerous source code repositories, and instructed its employees to “began communicating with DingTalk’s ephemeral messaging feature after the preliminary injunction issued.” Id. at *9-12. The Court found that Wang – as AllRide’s CEO – “must have had knowledge of AllRide’s spoliation,” and held him responsible for AllRide’s failure to preserve relevant ESI. Id. at *13. With respect to Huang, the Court found that he had not only attempted to destroy any evidence of his misdeeds by wiping his WeRide computers, but that he had also modified and deleted source code files stored on his AllRide laptop. Id. at *13-16. The Court found that these activities cumulatively resulted in a loss of evidence that incurably prejudiced WeRide’s ability to prove its affirmative case. Id. at *9-16. Therefore, terminating sanctions were levied against all defendants.
While WeRide is an extreme case, the Court’s ruling and its underlying facts hold many important lessons. For example, many early-stage companies lack solid or consistently-enforced data retention plans, may not monitor auto-delete features on their email systems, and may not have defined policies that govern whether and how company resources (like computers and other electronic equipment) are repurposed upon an employee’s termination or departure. In the case of WeRide and AllRide, one company’s diligence and preparation on these fronts provided it with the evidence it needed to construct a highly-persuasive case of trade secret misappropriation. The other company’s failure to do so – in addition to a litany of dubious activities that cast doubt on its credibility – deprived it of the evidence it needed to defend itself from those claims, and ultimately led to case-terminating sanctions.
As such, WeRide serves as a reminder to all potential litigants – both established and growth-stage – to develop robust data retention policies with the assistance of experienced counsel, and to ensure those policies are well-known and consistently applied.
Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe. A potential victim of trade secret theft, or the accused, should swiftly consult experienced litigation counsel.