In Red Wolf Energy Trading, LLC v. BIA Capital Mgmt., LLC, No. 19-10119-MLW (D. Mass. Sept. 8, 2022), Massachusetts District Judge Mark L. Wolf granted the plaintiff’s Second Motion for Sanctions and awarded a default judgment sanction against the defendants for “repeated” discovery misconduct, including failing to produce a smoking gun Slack exchange.

Case Discussion

In this case involving misappropriation of trade secrets by an employee of the plaintiff who allegedly used the plaintiff’s proprietary software to place mock trades on behalf of defendants, Judge Wolf began his order (that was so long, it needed a table of contents) by stating: “this case has generated more meritorious motions to compel and for sanctions against defendants for failure to produce documents than any other case in which this court has presided in more than 37 years.”

On two separate occasions (in April and August of 2021), Defendant Moeller filed a sworn affidavit on behalf of all defendants claiming to have complied with the discovery requirements set forth in FRCP Rule 26(e). However, the defendants later produced 47 documents in from Defendant Bia’s Google Vault that had not been previously produced, which included documents significant to the plaintiff’s claims. The 47 documents included 14 still images of the plaintiff’s system, an excel file that appeared to be an export of certain data from the plaintiff’s software and a PowerPoint that included screenshots of the plaintiff’s proprietary software.

In April 2022, the plaintiff received additional Slack communications that should have been produced in 2019. After reviewing those documents and taking Moeller’s deposition, the plaintiff believed that it still had not received all the relevant Slack messages. In June 2022, the plaintiff filed a Second Motion for Sanctions, requesting default judgments based on defendants’ repeated failure to produce required Slack communications, emphasizing the court’s orders that defendants review and supplement their prior productions, and Moeller’s sworn claims to have done so. After that motion was filed, in July and August 2022, defendants produced additional Slack messages that had not been produced previously.

In August 2022, the court ordered defendants to provide the plaintiff with a copy of the 2019 Slack Archive to be searched by the plaintiff’s litigation data vendor (UnitedLex), which found that Bia failed to produce at least 128 relevant messages that contained a search hit, including a smoking gun Slack exchange in which Defendants Greg Moeller and Michael Harradon discussed creating a new algorithm to hide the fact that the original algorithm was derived from the plaintiff’s intellectual property. In the exchange, Moeller asked Harradon:

“[w]ould it be possible for you to create another algorithm from scratch? We are trying to come up with ways to make this go away…. we would need to be able to convince an outside observer that it was from scratch, not really sure what this would mean…” Harradon responded, “If that means not derivative from IP then I think so…”

The plaintiff also filed an affidavit from Derek Duarte, Senior Vice President of UnitedLex, which conducted the search of the 2019 Slack Archive. Duarte stated that, in 2019, (in direct contrast to the defendants’ claim that discovery from Slack was difficult and non-standard) they could have used “a standard eDiscovery processing tool” to search and produce Slack messages for a cost of about $10,000 and also that he found an “anomaly” — 87 empty folders in the 2019 Slack Archive — which, he stated, “supports an inference that deletion of channel data occurred after export from Slack but prior to transfer to Red Wolf.”

Judge’s Ruling

Judge Wolf stated: “Defendants’ repeated misconduct occurred despite two orders to review their document production and, if necessary, supplement it as required by Federal Rule of Civil Procedure 26(e). Moeller twice submitted affidavits representing that he had complied with those orders.” He also stated: “Red Wolf has been seriously prejudiced by 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 Bia and Moeller 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.”

Finding that “Red Wolf’s Second Motion for Sanctions is meritorious”, Judge Wolf stated: “The court recognizes that entering a default judgment for violation of discovery orders is a drastic sanction. However, in this case it is fully justified and, indeed, necessary to do justice in this case and to deter others from engaging in similar extreme misconduct… Therefore, the Second Motion for Sanctions is being allowed. Defaults are being entered against Bia and Moeller on all claims. The parties are being ordered to confer and report concerning what proceedings should be conducted to determine the amount of damages, and the nature of possible injunctive relief, Red Wolf should be awarded.”

So, what do you think? Do you think the default judgment would have been awarded without the smoking gun Slack exchange? Or would the defendants’ overall pattern of misconduct have resulted in the same result? Please share any comments you might have or if you’d like to know more about a particular topic.

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