Trade Secrets and Spoliation; Carmichael v. Separators, Inc.

Separators is a centrifuge company. Over the course of its existence, it has amassed a large collection of reference materials, all of which have been digitized. Carmichael was Separators’ parts manager for eight years, and Monday was Carmichael’s assistant. Neither Carmichael nor Monday signed a non-compete, non-solicitation, or confidentiality agreement with Separators.

In December 2012, Carmichael formed CSI as a direct competitor to Separators, and he formally resigned from Separators in March 2013. Before he left the company, Carmichael copied hundreds of manuals from the technical library and subsequently copied those electronic files onto his CSI computer, all without Separators’ consent.

After Carmichael left, Monday became the parts manager. But he left Separators in February 2015 to join CSI as its vice president. Before he left Separators, and without the company’s consent, Monday copied thousands of data files relating to Separators’ business, including the manuals, sales documents, service parts lists, and customer quotes. He then downloaded all of this information onto CSI’s computers on his first day of work at CSI.

Separators sued CSI, Carmichael, and Monday for taking its confidential information
and trade secrets. The trial court issued (1) a TRO preventing the defendants from using
that information and (2) an order that the defendants preserve electronic evidence (the
OPEE).

The defendants were personally served with these documents at 6:00 p.m. on September 14, 2015. Three minutes later, approximately 100 files related to Separators were deleted from CSI’s computers. And about an hour later, another 1063 items related to Separators were deleted. Sometime later, Carmichael deleted another 20 documents related to Separators.

Separators moved for a preliminary injunction (PI) that enjoined the defendants from destroying computer files related to Separators, and the trial court set a hearing on that motion for September 23. A stipulated PI was entered on that day, and CSI’s computers were turned over for forensic examination on September 24. Between September 22 and 24, another 932 files related to Separators were deleted. CSI also failed to give all of its devices to Separators’ computer forensics expert. CSI then made the previously-deleted material irretrievable before it could be turned over. Carmichael also deleted emails after receiving the OPEE.

Separators sought to have the defendants held in contempt and requested a default judgment. After a hearing, the trial court granted that motion and ordered a default judgment on most of Separators’ claims and awarded attorney’s fees. It also ordered that the defendants would be subject to third-party oversight of their electronic data use for two years “in order to ensure that the Defendants did not violate [the trial court’s] orders in the future.”

After more discovery, Carmichael moved for summary judgment, arguing that many of Separators’ claims were time-barred. Separators argued that this argument was precluded by the default judgment, and the trial court denied the motion.

The case eventually was tried on Separators’ damages claims. After a bench trial, the trial court entered judgment for Separators in the amount of $8,680,447 in compensatory damages and $3,000,000 in exemplary damages. Carmichael appealed.

On appeal, Carmichael first argued that the trial court erred when sanctioning him for the discovery violations, since Monday deleted the documents. He argued that the trial court erred in finding that he conspired with Monday on this issue because, as agents of CSI, they were but one entity for conspiracy purposes. But Carmichael did not raise this argument until a motion to correct error filed after the trial court entered its damages award.

Separators argued that Carmichael should have raised this issue in a 60(B) motion, rather than a motion under Rule 59. The Court found that Separators waived this argument by not raising it below. Nevertheless, it found that Carmichael could not prevail because he could not raise the issue for the first time in a Rule 59 motion.

Carmichael’s intracorporate conspiracy argument was available to him at the commencement of the instant litigation, but he did not raise it in his Answer to the Complaint, in his written objection to the rule-to-show-cause motion or its supporting memorandum, during the three hearings on the show-cause motion, or in his proposed findings of fact and conclusions of law for the show-cause proceedings. Indeed, this issue was not raised until after the trial court had conducted a four-day bench trial on damages, the parties had engaged in post-trial briefing, and the trial court had entered its Order on damages. The argument Carmichael presents was not raised by the Defendants until they filed their March 5, 2019, Motion to Correct Error. We conclude that Carmichael waived this issue, and inasmuch as the trial court considered it in denying Carmichael’s Motion to Correct Error, it should not have.

The Court then turned to the question of whether there were facts supporting the conclusion that Carmichael and Monday agreed to delete the documents, and it found that they did.

The discovery orders contained clear directives: The Defendants were not to destroy, or render unavailable, any data relevant to Separators, and they were to produce all devices and internet-based accounts used to store data related to Separators. Carmichael and Monday had a long history of working together at Separators and admittedly removed data from Separators without Separators’ express consent before leaving that company. Carmichael is the president and sole shareholder of CSI, and Monday is CSI’s vice president. … Carmichael was first served with the TRO, OPEE, and the Complaint that named the Defendants in a suit based on their taking Separators’ data without Separators’ consent. According to Carmichael, Monday was with him at Carmichael’s home when Carmichael was served. Within three minutes of Carmichael being served, 100 files were deleted from the Pockey USB. The reasonable inference to be made from these facts and circumstances was that Carmichael and Monday agreed that part of their efforts to defend the allegations contained in the Complaint would be to eliminate evidence in their possession that could prove Separators’ claims. The subsequent deletions of data from the Seagate USB and the CSI computers, the concealment of the internetbased data storage accounts and the WDP device, and the overwriting of deleted data on the Pockey USB were other acts in furtherance of that agreement.

Carmichael argued that a default judgment was too harsh a penalty for his conduct, but the Court again disagreed. It characterized the defendants’ actions in this case as “the apex of the spoliation culpability continuum” and found that when the conduct is this egregious, a trial court does not need to fashion progressive sanctions before entering a default.

We agree with the trial court that Carmichael’s and Monday’s conduct was egregious and demonstrated a flagrant disregard for the trial court’s discovery orders and the judicial process. This is precisely the type of discovery misconduct that should be sanctioned by default so as to discourage other litigants from attempting it.

This conclusion was supported by the prejudice the spoliation did to Separators’ ability to prove its case.

Here, Carmichael and Monday admitted that they had taken data from Separators, but they claimed that they had only taken the manuals which they contended were not trade secrets or proprietary to Separators. Separators disputed that Carmichael and Monday took only the manuals. … In order to prosecute these claims, it was essential for Separators to know the totality of the data taken and how it had been used by the Defendants.

And while the amounts at issue in this case (over $11 million) were substantial, there were no “weighty policy determinations” that could convince the Court that a default judgment was inappropriate in these circumstances.

Next, the Court addressed whether Carmichael could move for summary judgment after default judgment had been granted against him on the claims at issue in the Rule 56 motion. And while it acknowledged that there may be some circumstances under which that may be appropriate, they did not exist here.

We believe that the nature of a default judgment entered as a sanction for discovery violations, as opposed to a default judgment entered for other reasons such as a failure to appear and answer a complaint, precludes subsequent procedural attacks such as the one mounted by Carmichael in this case.… Trial courts are permitted to exercise their contempt powers to promote orderly discovery and punish discovery violations so that others are not tempted to engage in like conduct. To allow such a procedural attack on a trial court’s sanction would be to seriously undermine the ability of trial courts to exercise their contempt powers to further those ends.

Finally, the Court affirmed the damages awards.

I cannot imagine that defense counsel was pleased with their clients’ conduct in this case. After all, it is difficult to defend the indefensible. But this case should serve as a lesson to impress upon clients the need to preserve evidence when they know of a possible lawsuit, particularly when ordered to do so by a court.
Lessons:
1. Preservation letters and preservation orders are important tools of litigation. Don’t overlook them.
2. When a court orders the preservation of evidence, preserve it; spoliation of evidence can make a bad situation worse.
3. The absence of a confidentiality agreement or non-compete does not leave a business defenseless when its proprietary information is taken by a departing employee.

Contact Us Today

refer a case or discuss co-counsel opportunities

Contacting this law firm does not create an attorney-client relationship. Do not provide confidential information until an attorney-client relationship has been established.