Disappearing Act: Northern District of California Issues Rare Terminating Sanctions for Spoliation on a Massive Scale

In WeRide Corp. v. Kun Huang, the Northern District of California addressed an egregious case of discovery abuses and spoliation by defendants in a business litigation involving the alleged theft of autonomous vehicle technology. Applying Federal Rules of Civil Procedure 37(b) and 37(e), the court issued rare terminating sanctions against several defendants who willfully and intentionally deleted various forms of ESI, including relevant emails, status reports, and source code, well after the commencement of litigation and after a preservation order issued by the court requiring the preservation of such information. Defendants compounded these abuses by adopting the use of “DingTalk,” an ephemeral communication technology, after the court had issued the preservation order.

WeRide, a technology company engaged in the business of developing autonomous cars, employed defendant Jing Wang as CEO in January 2018. WeRide alleged that Wang went on to form his own company, AllRide, as a direct competitor. WeRide also alleged that former employee defendant Kun Huang was recruited by Wang to work for AllRide while still employed by WeRide. WeRide alleged that Huang downloaded various forms of data during this time period and transferred this data onto several USB devices from two WeRide-issued computers, then proceeded to delete files from the devices. WeRide further alleged that AllRide and Huang stole WeRide’s source code, developing their own autonomous car based on the same specifications as WeRide’s code.

Plaintiffs’ motion for sanctions revolved around defendants’ alleged spoliation that included numerous deleted emails and email accounts, deleted source code relating to the technology at issue, and the adoption and use of DingTalk well after defendants’ duty to preserve relevant ESI had been triggered. In addition, defendants destroyed emails by failing to modify automatic deletion settings that deleted emails older than 90 days and maintaining those settings after receiving notice that the “litigation was imminent, despite receiving the complaint, and despite this Court’s March 22, 2019 preliminary injunction . . .” Defendants further destroyed email accounts belonging to relevant custodians, and relevant source code, after litigation had been commenced and after the court issued a preliminary injunction specifically directing the preservation of such materials.

In finding that the most severe sanctions – the striking of the defendants’ answers and entry of a default judgment against them – were appropriate under both subsections of Rule 37, the court emphasized that much of the overt spoliation activity and the AllRide employees initiation of DingTalk communications, occurred after a preliminary injunction had been issued in the case and when discovery was underway. The court also detailed spoliation on a massive scale and made clear that the circumstances surrounding this conduct evinced a clear intent to deprive AllRide of the use of the spoliated evidence in the litigation, an essential factor for imposition of terminating sanctions under Rule 37(e)(2). Critically, the court further determined that other severe sanction options that are frequently invoked by courts in such egregious situations, including an adverse inference instruction to the jury, would simply not suffice to counter the extreme prejudice to AllRide from defendants’ conduct.

While Rule 37(e) has had its intended effect of making serious sanctions more difficult to secure in even serious spoliation cases, the WeRide decision demonstrates that such sanctions are available and will be imposed when large scale and clearly intentional spoliation is undertaken. The decision presents a stark lesson for litigants who choose to engage in such conduct. There is no question that the major takeaway from WeRide is the cautionary lesson as to the potential for terminating sanctions. However, the court’s treatment of DingTalk is a reminder that while the use of ephemeral messaging systems may be appropriate in a wide variety of business settings, it certainly was not in this situation where the parties were on notice of the need to preserve ESI.

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