From left: Dana J. Finberg and Jake Christensen of Arent Fox.

A recent decision from the Northern District of California granted case-terminating spoliation sanctions under Federal Rules of Civil Procedure 37(b) and 37(e). The decision in WeRide Corp. v. Kun Huang followed the defendants' deletion of months' worth of e-mails and entire e-mail accounts; permanent erasure of computer data, including source code; and use an ephemeral chat service that immediately deleted all sent and received instant messages. The case is a textbook example of what not to do to meet one's obligations to preserve potentially relevant documents, information and things at the earliest sign of litigation.

Case Background and Procedural History

WeRide, a San Jose-based autonomous driving startup, filed the case after it terminated Jing Wang, its former CEO. Wang thereafter (1) founded WeRide competitor AllRide; (2) disparaged WeRide to investors despite his separation agreement's non-disparagement clause; and (3) solicited WeRide employees, including Kun Huang. During the two months that he remained as WeRide's director of hardware development, Huang downloaded significant amounts of WeRide data from its servers and his company laptop; solicited WeRide employees to work for AllRide; and, after WeRide discovered the solicitation and terminated Huang, completely wiped or deleted files from two WeRide laptops.  

After Huang arrived at AllRide, AllRide began hosting potential investors for video demonstrations of its autonomous driving software (video demonstration), which mimicked the proprietary software capabilities and hardware configurations of WeRide's software. In short order, WeRide sent both Wang and Huang cease-and-desist letters; Huang's counsel issued a document hold notice to AllRide; and WeRide filed its complaint against Wang, Huang, ZKA (Huang's LLC), AllRide, and Kaizr (AllRide's corporate alter-ego). The complaint alleged misappropriation of trade secrets, defamation, intentional interference with prospective economic advantage, breach of contract, intentional interference with contract, breaches of fiduciary duty and the duty of loyalty, actual fraudulent transfer, constructive fraudulent transfer, and common law fraudulent conveyance.

After learning of AllRide's video demonstrations, WeRide also moved for and was granted a preliminary injunction against Huang and AllRide. By March 2019, the court had enjoined AllRide and Huang from using or disclosing WeRide's alleged trade secrets or confidential information, ordered Huang to make certain electronic devices available to WeRide for inspection, and further prohibited Huang and AllRide 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" concerning WeRide's alleged trade secrets or other confidential material or information, as well as AllRide's source code. 

Unbeknownst to the court and WeRide, AllRide discovered in mid-June 2019 that it had left its e-mail server's 90-day auto-delete setting (which saved AllRide several hundred dollars per month in electronic storage costs) enabled, triggering the destruction of all e-mails dated prior to mid-March 2019. Despite a lengthy discovery dispute process that resulted in a motion to compel, AllRide failed to disclose this, along with the destruction of six e-mail accounts belonging to Wang and his wife, to the court and WeRide until August 2019. AllRide also failed broadly to distribute a litigation hold from Huang's counsel, which it received more than nine months earlier, until August 2019.

The magistrate judge in the case appointed a neutral forensic inspector to investigate the alleged destruction and granted a modification to the preliminary injunction that compelled the defendants to make additional sources, including any computers, servers, or cloud accounts that had stored AllRide's source code, available for discovery. The ensuing investigation ultimately yielded only snippets of e-mail conversations (mostly sent to or received from external e-mail systems), in addition to some portions of previous versions of AllRide's source code that were not capable of the functionalities shown in the video demonstration. Given the dearth of preserved, mostly haphazardly reconstructed ESI from the crucial time period during which Wang solicited Huang, Huang remained at WeRide while also working for AllRide, and AllRide claimed to have created the source code portrayed in the video demonstration, WeRide moved the court for Rule 37(b) and 37(e) sanctions against AllRide.

Determining Spoliation

Federal Rule 37(b) sanctions are appropriate where a party (or its officer, director, or managing agent) fails to comply with a court order. Relevant considerations include "(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions." Op. at 17. As to weight, "factors 1 and 2 support sanctions and 4 cuts against case-dispositive sanctions, so 3 and 5, prejudice and availability of less drastic sanctions, are decisive." Id. at 17, 20 (noting that the third factor "is the most critical [factor] … because it goes to whether the discovery violations threaten to interfere with the rightful decision of the case.") (citations omitted). Willfulness, fault, or bad faith are perquisites to dismissal sanctions.

Federal Rule 37(e) allows courts to sanction parties if "(1) the ESI should have been preserved in the anticipation or conduct of litigation; (2) the ESI is lost because a party failed to take reasonable steps to preserve it; and (3) [the ESI] cannot be restored or replaced through additional discovery." Id. (citation omitted). Before a court may terminate an action, the subject party must have "acted with the intent to deprive another party of the information's use in the litigation." Id. No actual deprivation or prejudice to the non-spoliating party is required.

To the Spoliator Go the Sanctions

Despite its duty to preserve evidence generally and specifically under the court's preliminary injunction, AllRide conceded its destruction of e-mails and other files at the outset. The court found that AllRide willfully and in bad faith destroyed (1) months' worth of potentially relevant e-mails by maintaining its server's auto-delete setting and (2) entire e-mail accounts of relevant parties. This "mass destruction of e-mail … irredeemably" limited WeRide's ability to prosecute its claims against AllRide. Indeed, "AllRide's destruction of evidence was so sweeping that" lesser sanctions of exclusion of evidence or adverse inference jury instructions were insufficient, such that the case could not be resolved on the merits. Id. at 22–23. 

Terminating sanctions were especially warranted under Federal Rule 37(e) because AllRide repeatedly destroyed ESI that "should have been preserved in anticipation of litigation," a duty that "begins when litigation is pending or reasonably foreseeable." Id. at 23 (citation omitted). No lesser sanction was available because AllRide was only able partially to restore or replace the destroyed ESI, especially considering AllRide's intentional "disturbing pattern of destroying discoverable material" stretching from its founding to well past the court's entry of a preliminary injunction.

Wang, as CEO and agent of AllRide and the husband of its parent company's owner, was personally subject to terminating sanctions based on his knowledge of AllRide's spoliation. Huang was similarly liable under Federal Rule 37(b) for willfully altering over 1,000 source code files (thereby rendering them "useless") prior to WeRide's inspection of the same, in spite of the preliminary injunction. Given that litigation was reasonably foreseeable upon his termination from WeRide, terminating sanctions were similarly appropriate against Huang under Federal Rule 37(e) after he destroyed ESI on two WeRide laptops, completely wiped and returned a personal laptop within hours of receiving a WeRide cease-and-desist letter, and altered AllRide source code. Id. at 29–30. 

Key Takeaways on Satisfying the Obligation to Preserve

The court ultimately ordered AllRide, Wang, and Huang, jointly and severally, to pay WeRide's reasonable fees and costs stemming from the preparation of its motion for sanctions; all discovery related to the three defendants' spoliation; and the discovery motion practice that preceded WeRide's motion to compel. The court reached this decision without even deciding whether the spoliation was deliberate. 

While no case is likely even to approach the gamut of such repeated, multifaceted, and extreme spoliation, companies should take heed that committing just one of the spoliating acts at play in WeRide Corp. could subject the offending company to similarly severe sanctions in the future. The decision offers the following poignant reminders for all companies facing the possibility of litigation:

1. Immediately involve your IT department to determine the scope of your company's retention policies.
2. Disable any electronic auto-deletion of potentially relevant e-mail archives, computer/server backups, and logs of internal chat or instant message conversations, as well as any regularly scheduled destruction of physical documents, items, or things.
3. Create and implement a litigation hold as soon as the possibility of litigation arises (i.e., when you receive a cease-and-desist letter; do not wait until after the complaint is filed or you're hit with a preliminary injunction). Be clear that the litigation hold applies to employees' company and personal devices.
4. Require employees to certify in writing that they (1) received the litigation hold and (2) agree to comply with its instructions. Maintain copies of the certifications as proof of compliance. Reiterate their preservation obligations at regular intervals and in different mediums throughout the duration of any pending litigation.
5. If possible, work with your IT department to disable (a) USB and other external ports on company devices, (b) employees' ability to delete or rename files on their devices, and (c) employees' ability permanently to wipe company devices.
6. Preserve all company electronic devices, e-mail accounts, ESI, and hard-copy files of terminated employees that may be relevant to any possible, imminent, or existing litigation.
7. Fully implement, and monitor and document compliance with, all external or opposing party litigation holds on top of any existing internal requirements.
8. Ensure that your company and employees fully comply with each requirement of any TRO or preliminary injunction issued against your company until it expires.  

Dana Finberg is a partner in Arent Fox's San Francisco office where he serves as trial counsel in patent, trade secret, trademark, trade dress, and copyright litigation throughout the United States. Jake Christensen, an associate with the firm, has a practice that includes health care and international banking compliance investigations, a broad range of complex business and intellectual property litigation matters, and lobbying and regulatory compliance.