Litigation holds and trade secrets: lessons from Bradford Technologies, Inc. v. NCV Software.com

"We have met the enemy and he is us."

–Walt Kelly's Pogo

Trade secret misappropriation claims often start out with tales of employees leaving for greener pastures, carrying with them a laptop or a thumb drive full of their former employer's proprietary information. With such scenarios come challenging questions about litigation hold instructions at the new employer. But defendants and potential defendants don't hold a monopoly on the document preservation issues related to trade secret theft. A recent Northern District of California case shows that plaintiffs must also tread carefully when it comes to the actions of their employees.

In Bradford Technologies, Inc. v. NCV Software.com, 2013 WL 4033840 (N.D. Cal.), the court awarded substantial sanctions based on the plaintiff's mishandling of source code produced under a protective order. The behavior detailed in the court's order is a mixture of that which defies common sense and that which is unfortunately all too common. The president of the plaintiff company, Bradford Technologies ("Bradford"), was improperly given copies of confidential source code produced by opposing counsel. In preparation for mediation, instead of providing the confidential source code materials to an expert for comparison to Bradford's software, the president chose to perform his own code analysis. To accomplish that, he copied the defendants' source code onto his laptop and ran a comparison program. He also asked another Bradford officer to prepare a document comparing the interface elements of the companies' respective products.

After the defendants learned at mediation of the Bradford president's actions, their counsel emailed Bradford's counsel and demanded that he preserve all materials relating to the president's code comparison.[1] Then, a few days later, the defendants countersued, asserting trade secret misappropriation and related claims arising from the Bradford president's handling of their source code. The next day, the court ordered that a litigation hold be put in place, and the plaintiff returned the source code discs the following week. Around the same time, the Bradford president deleted the defendants' source code from his computer. Also, with what the court described as "suspicious" timing, the Bradford officer who had been charged with comparing the interface elements wiped his own laptop clean (he later said it was because he was leaving the company and had put materials related to his new job on the Bradford laptop). Finally, more than a month after the court's order to put a hold in place, plaintiff's counsel provided a litigation hold memorandum to opposing counsel, although there was no evidence that it was ever circulated internally at Bradford.

The court awarded nearly $100,000 in monetary sanctions for Bradford's violations of the protective order and then ordered expedited discovery on the spoliation issue. When the defendants finally obtained the Bradford president's laptop for forensic analysis, they stated that they were unable to fully determine what he had done with the defendants' source code. They sought terminating or "death penalty" sanctions, and the court said it was a "close issue" but ultimately denied such sanctions for the lack of evidence of any prejudice to the defendants as a result of Bradford's conduct. However, the court stated that it would award defendants their expenses for the expedited discovery regarding Bradford's conduct. And, certainly worst of all, the court indicated that it might allow the Bradford president's credibility to be impeached at trial based on the destruction of evidence.

For both plaintiffs and defendants, Bradford Technologies is an important reminder of the importance of the prompt, proper circulation of a litigation hold instruction in trade secret litigation. Of course, Bradford's counsel never should have allowed the Bradford president to handle the defendants' source code. But even with that bad fact, a timely and properly circulated litigation hold likely would have curtailed the costs of the misstep. Employees cannot be controlled completely, but in-house and outside counsel may reduce the potential for monetary and evidentiary sanctions (and worse) by taking proper steps to ensure that their employees know that the company's wish is for no relevant records to be deleted or altered, regardless of location. If the evidence being held is of a sort that the company arguably shouldn't have (such as the other party's alleged trade secrets), there are ways to resolve the inherent Catch-22. Often, escrowing data with a third party may be the best option, or counsel may seek guidance from the court or opposing counsel. Simply put, when allegations of spoliation are a possible outcome, it is almost always better to ask for permission than for forgiveness.