Cache Bux was riding high as the president of Nodding Donkey Oil Field Services which recently opened new offices in Peru. Nodding Donkey’s earnings were beyond its wildest projections. Cache would easily hit his annual employment agreement performance incentives – entitling him to a substantial year-end bonus. But Cache’s elation plummeted when he overheard two directors on Nodding Donkey’s board discussing a plan to fire him for “cause” to avoid paying his almost-certain bonus. Knowing there were no grounds for termination, Cache persuaded an IT consultant to scour the directors’ emails, which revealed multiple communications planning their scheme. Fearing the directors’ emails would be deleted, Cache gathered and saved them on a flash drive, along with the company’s financial reports, demonstrating that he satisfied all performance metrics. Cache hid the flash drive at home. Sure enough, the directors fired Cache for “cause” days before the annual bonus numbers were revealed. Cache hired a lawyer and turned over the emails and financial reports, thinking that he was well on the path to victory. He had saved key evidence, right? Or, did he?
Most likely not. In fact, Cache may well have snatched defeat from the jaws of victory.
A 2018 case from the Tenth Circuit Court of Appeals strongly suggests that Cache’s efforts to save his critical evidence may well sink his case. In Xyngular Corp. v. Schenkel, a shareholder and director suspected that his colleagues on the board of directors were engaging in improper self-dealing, so he asked an IT department employee to download documents disclosing their suspected misconduct. Cache’s counterpart and his employer-corporation eventually became embroiled in a lawsuit. After the corporation discovered “Cache” took corporate documents, it requested that the district court sanction him. The trial court judge agreed, granted the motion and dismissed all of “Cache’s” claims against the corporation.
On appeal, the Tenth Circuit agreed with the trial court judge and affirmed the dismissal. It held that “a court may exercise its inherent power to sanction bad-faith conduct that abuses the judicial process, including pre-litigation acts that directly affect the lawsuit.” The court concluded that taking the company’s documents “amounted to a circumvention of the discovery process and the built-in protections for parties’ interests.” The corporation was deprived of the opportunity to resist disclosure of the documents because they were irrelevant, confidential or privileged.
Moreover, the appellate court stated that it was immaterial whether the documents were actually confidential or privileged. Instead, the court’s question was whether “Cache” “acted willfully, in bad faith, and with fault in a way that abused the judicial process in collecting them.” Because “Cache” did so, the court held that sanctions were appropriate, and that “any sanction short of dismissal would incentivize future litigants to similarly misappropriate documents in anticipation of litigation.” Thus, under Xyngular, “Cache’s” efforts to save evidence to support his claim may end up defeating it.
But dismissal of Cache’s claims are not his only concern. Misappropriating corporate documents also gives Nodding Donkey damage claims to assert against him – including claims for breach of his employment agreement, conversion of corporate property and violations of the Computer Fraud and Abuse Act. If the documents contained trade secrets, Nodding Donkey could also sue Cache for violations of the Uniform Trade Secrets Act. As a result, Cache may be liable to Nodding Donkey for its damages and its attorneys’ fees.
Tilting the Scales in Your Favor
So, being prepared could hurt you. If you are an employee, director or officer who believes you may have a claim against your company, do not remove any documents from the company to bolster your claim. That holds true even if you fear that the company may delete or destroy those documents. The courts have detailed rules governing discovery and the orderly exchange of documents in litigation, including rules that prohibit and punish the destruction of evidence. As imperfect – and, frankly, frustrating – as those rules may be, potential litigants must rely on them and cannot resort to self-help. Otherwise, you risk not only losing your case because you cannot keep the evidence, but you may also find yourself facing court-ordered monetary sanctions, including dismissal, as well as a host of possible counterclaims from the company.