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Defense May Win Championships, But What Wins Litigation?

I love Christmas, and I love football, so with Christmas lights up and my Dallas Cowboys headed to the playoffs, I’m feeling pretty good. (We won’t talk about the Longhorns right now.) I also love football clichés, like “defense wins championships.” Another one is that the team that wins the turnover battle will usually win the game. More about that later.

The question I’m posing for my Fivers[1] this week is this: when a key employee or executive leaves a company to compete against the company, what is the very first issue the company and its lawyer should address? (I mean other than the lawyer’s hourly rate and the amount of the retainer.)

Regular readers of this blog can probably think of some obvious candidates:

These are important issues, but there is something else you should think of first. When a key employee or executive leaves a company to compete, the most immediate issue for the company and its lawyer is preservation of evidence. Specifically, preservation of electronically stored information (ESI).

There are three reasons why preserving potentially relevant ESI is the first issue to address.

1. Preservation of ESI is a time-sensitive issue

First, preservation of ESI is the most pressing issue because it is the most time-sensitive. Preservation of paper evidence—does that even exist anymore?—is not as pressing. Absent a flood or fire, paper evidence will probably still be there unchanged in a month, or even a year. Kind of like a box of Twinkies. But evidence in electronic form can easily be lost, altered, or damaged in the short term, even without any deliberate effort to delete it.

raspberry-preserves
Preservation. It’s not just for jelly.

The most obvious way that relevant ESI can be lost is for the departing employee to take it or destroy it. I had a case where my client got wind that an employee was about to leave and violate his non-compete. The first thing I told my client to do was “get his laptop—now.” As a result, my client was able to recover evidence from the employee’s laptop that was highly damaging to the employee in the ensuing litigation. Had we waited, that evidence might have been lost forever. (It was a company-issued laptop; obviously, the issue is more complicated if the employee is using his own computer.)

So, if a key employee leaves and the company expects there may be a lawsuit, typically the first thing the company needs to do is get its hands on the employee’s company-issued computer and smartphone (if any). Make a simple “chain of custody” form to keep track of who has physical possession of the devices. Follow up with a litigation hold notice to key players at the company, etc. There is of course a wealth of literature from experts like Craig Ball on how to do this. But the key thing is to act quickly before relevant ESI is lost or destroyed.

2. Preserving relevant ESI cuts across all the issues in a lawsuit.

The second reason that preserving relevant ESI is so important is that it potentially affects all other issues in a case:

  • Is the employee’s non-compete enforceable? As I explained here, that may depend on whether the company actually provided the employee confidential information, which may have been done by email. It could depend on the sales territory the employee actually worked, which could be revealed by the employee’s text messages to customers.
  • Did the employee plug a USB drive into his company computer a week before leaving and download the company’s confidential information and trade secrets? Forensic experts can probably find out, if the computer has been properly preserved.
  • Did an employee breach his Fiduciary Duty Lite™ by crossing the line from preparing to compete to actually competing?[2] You might need an expert to recover deleted emails from six months earlier to find out.
laptop-and-cappucino
Get the laptop and smartphone. Leave the cappuccino.

In short, it doesn’t matter how well you understand the typical legal issues that come up when a key employee leaves to compete. If you lose critical evidence necessary to prove your client’s claim—or to defend your client against the other party’s claim—then you are dropping the ball.

3. The failure to preserve relevant ESI can mean sanctions for spoliation

The third reason for moving quickly to preserve evidence is that the failure to preserve relevant ESI can result in spoliation sanctions. When a company expects there is going to be litigation with a key employee who left to work for a competitor, preserving potentially relevant ESI isn’t just smart litigation tactics. It’s the law.

As the Texas Supreme Court reaffirmed in Brookshire Brothers, a legal duty to preserve relevant evidence arises when a party “knows or reasonably should know” that there is a “substantial chance” that a claim will be filed.[3] In other words, a party must preserve relevant evidence when it reasonably anticipates litigation. The failure to preserve relevant evidence when there is a duty to preserve is spoliation of evidence.

“Spoliation” comes from the Latin word spoliare. Roughly translated, it means, “oh, crap, the judge is going to hammer us.”

The last thing a company wants is to be sanctioned by the judge for spoliation of evidence. The worst kind of sanction—other than outright dismissal of your claim or defense—is the “adverse inference” instruction to the jury. It goes something like this: “Ladies and gentleman of the jury, you are instructed that Plaintiff HMC (Huge Multinational Corporation) failed to comply with its duty to preserve relevant evidence, and you may presume that the lost evidence would have been favorable to Defendant Bob Bluecollar.”

Good luck winning over that jury, HMC’s counsel. It’s kind of like trying to get to the Super Bowl with your backup quarterback. Hmm. Strike that. It’s actually much worse.

The good news for companies that screw up preservation is that Brookshire Brothers sets the bar for obtaining spoliation sanctions fairly high. The general rule in Texas is that a finding of intentional spoliation is required to obtain a spoliation instruction to the jury. The standard in federal court is similar. Courts in the Fifth Circuit have required the party asking for an adverse inference instruction to prove the spoliation was in bad faith,[4] and Federal Rule of Civil Procedure 37(e) now requires a finding that the party acted with “intent to deprive another party of the information’s use in the litigation.”

img_1086
Brookshire Brothers. It’s not just a grocery store in Giddings.

But do you really want to rely on the defense that your client lost relevant evidence in good faith? Instead, have an expert make a forensic image of the departing employee’s computer and smartphone, which is now fairly routine and cheap. It’s like an insurance policy against a spoliation claim. It will certainly cost less than the hours of attorney time it will take to litigate whether the company’s spoliation of evidence was intentional or not.

And remember, it’s pronounced “spoh-liation,” not “spoil-ation.” I mean, you can be a stubborn Texan and say “spoil-ation” if you want, and hey, I kind of respect that, but it’s kind of like saying “nuke-yuh-ler” weapons.

Back to Football

So what does all this have to do with football? Well, as I said, it has become a football cliché that winning the turnover battle is the key to winning the game. Winning the turnover battle means having more “takeaways” than “giveaways.” If your team fumbles the ball away once but intercepts the ball three times, your turnover ratio is +2, and you’ve won the turnover battle. A high turnover ratio in your team’s favor is no guarantee of winning, but it’s pretty darn close.

Preservation of evidence is like winning the turnover battle. It’s not necessarily the most exciting part of the game. But if you fail to preserve relevant evidence and open yourself up to spoliation sanctions, it’s like fumbling the ball away to the other team. (For my white collar readers at big law firms, it’s like an unforced error in tennis.) If the spoliation is bad enough that the judge gives the jury the dreaded adverse inference instruction, it’s like throwing an interception that the defense returns for a touchdown. In the fourth quarter. With the game on the line.

Preserving evidence, on the other hand, is like a takeaway in football. If you act quickly to preserve ESI and discover a “smoking gun” document that proves your case, it’s as good as taking the ball away from the other team.

So think of preserving evidence as your best defense. And defense wins championships.

_________________________________________

head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands. In high school he starred on the football field every Friday night—in the marching band.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] fiver [fiy-ver] noun. 1. A regular reader or fan of the blog Five Minute Law. 2. A celebrity who hosts Saturday Night Live for the fifth time.

[2] “Fiduciary Duty Lite” is a registered trademark of Five Minute Law. (Ok, not really.)

[3] Brookshire Bros., Ltd. v. Aldridge, 438 S.W.3d 9 (Tex. 2014).

[4] See Rimkus Consulting Group, Inc. v. Cammarata, 688 F.Supp.2d 598, 614 (S.D. Tex. 2010).

3 thoughts on “You Must Tackle This Issue First When Key Employees Leave to Compete

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