Trade Secret MisappropriationA former employee accused of stealing company trade secrets and confidential information dodged a bullet in the form of sanctions. Specifically, on January 30, 2017, a Georgia District Court held that mass deletion of company documents and multiple uses of computer wipe programs on a former employee’s personal devices AFTER a preservation notice was sent to the employee did not rise to the level of sanctionable conduct (HCC Ins. Holdings, Inc. v. Flowers 1/30/17 ).

HCC Insurance Holdings Inc. sued its former employees for misappropriation of trade secrets. HCC presented evidence that before one of those individuals resigned, Valda Flowers, she moved over 8,000 e-mails from her company e-mail account to various drives. She also deleted hundreds of documents from her work computer.

Before filing the suit, HCC sent Flowers a preservation notice. The notice directed her to retain all electronic evidence, including storage devices. After receiving the preservation notice, Flowers ran a computer wiping program on her personal laptop. HCC moved for an adverse inference sanction, arguing Flowers destroyed data on her personal laptop by using computer applications that made it impossible to determine exactly what HCC information Flowers misappropriated. On this point, a neutral forensic examiner was unable to locate any HCC confidential information or trade secrets on Flowers’ devices. HCC further contended that Flowers’ husband, an IT professional with 35 years of experience, helped her misappropriate HCC’s trade secrets and that he “could have utilized several methods to transfer HCC’s trade secrets to [Flowers’] personal devices without leaving any evidence on her HCC computer.”

Duty to Preserve Triggered

The court found that Flowers was under a duty to preserve evidence on her laptop when she received the preservation notice. As such, the court concluded that her conduct was “troubling” and in breach of that duty. Inexplicably, however, the court found sanctions weren’t warranted. It reasoned:

HCC does not provide any evidence to show that Flowers or her husband actually transferred any data from HCC Life to her personal devices or cloud storage media she controlled. HCC argues that Mr. Flowers ‘could have utilized several methods to transfer HCC’s trade secrets to [Flowers’] personal devices … But HCC does not present any evidence that Mr. Flowers in fact did so. HCC thus fails to show that any of its data was resident on any of Flowers’ or Mr. Flowers’ personal devices or was otherwise in their control.

In reaching this decision, the Court cited Federal Rule of 37(e). This rule governs how and when sanctions may be issued for the loss or destruction of electronically-stored information. But the court did not go through a step-by-step analysis under the Rule.

Take-Aways for Employers and Employees

Having been involved with numerous trade secret misappropriation lawsuits and spoliation issues involving computer evidence, this decision left me scratching my head. Simply, put, it the facts and circumstances involved in this case will more often than not give rise to sanctions. With that in mind, here are a few points for employers and individuals to consider to maximize the chance of obtaining sanctions in trade secret violations or to avoid or minimize sanctions being awarded:

For employers, consider:

  1. First, if there is any indication or concern that a former employee has misappropriated trade secrets or is otherwise in breach of a non-compete restriction, it is critical to investigate and it is equally important to preserve information investigated and maintain the chain-of-custody of any computers or similar devices investigated. 
  2. Second, sending a preservation notice is a great way to trigger a party’s obligation to preserve information that may relate to a lawsuit. This was a key point I made at a recent presentation about digital evidence.
  3. Third, sending a preservation notice also means your preservation obligations have been triggered. Therefore, make sure you’ve taken steps to preserve information and evidence that may relate to the claims.

Here are important considerations for employees:

  1. First, assume that access to or transfer of any email, file, database, or other company information will leave a “digital fingerprint.” And that fingerprint will persuade the court to award injunctive relief, establish liability, or to later award sanctions.     
  2. Second, one explanation Flower offered for the computer transfer activity and wiping was her husband simply transferred and wiped her personal files, e.g., iTunes and photographs. While this may be true, having personal items on a company provided laptop or device will often violate an employer’s policies. Also, early in a lawsuit, a judge may only be presented evidence of mass file transfer/deletion activity. This means the judge may not have the benefit of knowing whether the files at issue are business or personal. Even so, the transfer activity may often be enough to persuade a judge to issue injunctive relief until the content or file types are analyzed. 

For more information about investigating trade secret misappropriation issues or defending against such accusations, contact attorney Jason Shinn. He has been practicing law since 2001. Mr. Shinn has litigated trade secret misappropriation matters, Computer Fraud and Abuse Act, and noncompete disputes in federal and Michigan courts.