Pennywise and Pound Foolish: Default Judgment Entered Against Trade Secret Defendants as a Sanction for Inadequate E-Discovery

“The law is not a game, and . . . civil discovery is not a game of hide and seek. The decision in this case should encourage litigants to understand that it is risky business to recklessly or deliberately fail to produce documents, and perilous to disobey court orders to review and, if necessary, supplement prior productions. It is in the interests of the administration of justice to default [defendants] to send those messages.”

So said United States District Judge Mark L. Wolf in a 72-page decision in which he entered a default judgment as a sanction in a trade secret case against the defendants for what he referred to as “extreme misconduct.” Memorandum and Order on Plaintiff’s Motion for Sanctions, Red Wolf Energy Trading, LLC v. BIA Capital Mgmt., LLC, et al., CA No. 19-10119-MLW (D. Mass. Sept. 8, 2022).

The thing is, this all could have been avoided for a them $10,000 had the defendants simply hired a reputable e-discovery vendor at the outset of the case rather than a programmer in Kazakhstan with no prior experience in e-discovery involving Slack, a cloud-based messaging platform that was central to the dispute and turned out to contain damaging communications that were initially withheld, purportedly unintentionally. The decision to save $10,000 in vendor costs could now cost the defendants up to $10 million in damages—a thousandfold increase.

The facts and procedural history are long and circuitous, and not altogether important for purposes of the ultimate point here: that it is critical in this day and age to spend the money up front in litigation—especially trade secret litigation—to conduct e-discovery (and any necessary forensic examinations) the right way. It is an investment worth making, and a relatively small cost in the scheme of things. Nevertheless, the facts are illuminating.

Red Wolf, an energy trading firm that uses proprietary (and secret) algorithms to drive its trading activity, accused defendants of a “scheme to create and develop a competing business by unlawfully using and taking the software, trade secrets, and other assets of Red Wolf.”

During discovery, Red Wolf requested communications with several individuals and entities but was not satisfied with the defendants’ production. As a result, Red Wolf filed a motion to compel certain communications it had not received that were linked to other documents that had been produced. The Court granted that motion, ordering defendants to produce certain Slack communications. Defendants later affirmed that they had done so, stating that they had “reviewed our Slack communications and provided all [relevant] Slack channel communications.”

Red Wolf disagreed. Following deposits, it told the Court that “it is clear from the deposits and a further review of the evidentiary record that not all of those relevant Slack channels . . . were produced to Plaintiff by Defendants’ counsel.” In response, the defendants again represented to the Court that they had adequately searched Slack for responsive communications, asserting that they had hired a consultant to search Slack using search terms. According to the Court’s order, that consultant was “Minas Abramyan, who lived in Kazakhstan, had no experience with Slack, and would be compensated for his work with equity in [one of the defendant entities] rather than money.”

Nevertheless, the defendants subsequently discovered additional responsive documents, including some that the Court described as “significant evidence of the misappropriation of trade secrets and unfair trade practices that Red Wolf alleges.” Defendants claimed they had missed the documents previously because of an error in their original searches, but “did not address why the . . . documents were not found pursuant to the court’s earlier orders, and [defendant’s] sworn statements that a review had been conducted, any required supplementation had been made, and the defendant’s document production was complete.”

In response, Red Wolf filed a motion for sanctions, which the Court allowed and ordered defendants to produce all Slack communications between certain custodians during a four-year period, rather than relying on search terms. Upon review of the new Slack communications, Red Wolf discovered several that contained the search terms that the defendants had previously represented they had used in their initial searches but had not been produced. Defendants blamed this on their Kazakh programmer, who they said was hired “because of a limited budget” and because defendants could not afford a “top tier firm[] to do the search.” Defendants also claimed that they could not find any outside vendors to do the work, and that they were unaware of any tools that could be used to search Slack messages.

Red Wolf filed a second motion for sanctions, asserting that the recent production had contained “hundreds of ‘new’ Slack messages that contained the search terms initially applied by Defendants, including ‘Red Wolf’ and ‘RW’ that had not been previously produced in this litigation.” Upon reviewing an archive of older Slack communications that the Court ordered defendants to produce, moreover, Red Wolf’s own e-discovery vendor reported that it discovered even more documents containing search terms that had not been produced, including “a proverbial ‘smoking gun’ from January 22, 2019 ([] mere days after Red Wolf’s suit was filed) in which Defendants . . . discuss creating a new algorithm to hide the fact that the original algorithm was derived from Red Wolf intellectual property.” In addition, Red Wolf submitted an affidavit from its vendor stating that “in 2019, defendants could have used ‘a standard eDiscovery processing tool’ to search and produce Slack messages for a cost of about $10,000.”

The Court granted Red Wolf’s second motion for sanctions, holding that “Red Wolf has been seriously prejudiced by the defendants’ misconduct. That misconduct has also seriously injured the court’s ability to manage this case and others on its docket. As a practical matter, entering default judgments against [defendants] is the only viable Rule 37(b)(2) sanction. In any event, as explained below, default judgments are justified and the Rule 37(b)(2) sanction most appropriate to do justice in this case and to send a message to other litigants that it is perilous to repeatedly disobey court orders. . . . As the court repeatedly stated in 2021, it has never in more than 37 years had a civil case with more discovery disputes and motions for sanctions than this one. . . .”

The Court further ordered defendants to pay Red Wolf’s reasonable attorneys’ fees and expenses incurred in bringing the motion. “If they cannot or do not [do so]the court will give defendants’ counsel an opportunity to be heard concerning whether they [i.e., counsel] should be ordered to make up any deficiency.” Ultimately, the Court ordered the parties to meet and conference and report to the court, among other things, “what proceedings should be conducted to determine the amount of damages and possibly injunctive relief to be awarded to Red Wolf.” Red Wolf’s counsel told Law.com that “an expert calculated the amount to be around $10 million.”

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The moral of the story is not to be pennywise and pound foolish when it comes to hiring e‑discovery (and forensic) vendors in trade secret litigation. The same could be said for companies that hire outside counsel based on price alone. You get what you pay for, and you may even end up paying more in the long run. A lot more.