In what turned out to be a disastrous result for defendants, a Massachusetts Court issued a default judgment against certain salespeople who left their former company to form the new competing company. The default judgment was based on the defendants’ conduct during the discovery phase of the case, in which they failed to follow the terms of the Court’s Preliminary Injunction, including misrepresenting their compliance to the Court, destroying evidence, and using confidential information to sell products to certain businesses, all of which was specifically barred by the terms of the Court’s Order.

Facts
In Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320, plaintiff, a distributer of packaging products, sued certain individuals who had been salesmen for the company until they resigned to form Packaging Partners, LLC, a competitor. The plaintiff also sued Packaging Partners, LLC claiming that the defendants had misappropriated confidential information and used it to solicit and obtain business from plaintiff’s customers.

Upon filing the lawsuit, the plaintiff obtained an Order for Expedited Discovery and to preserve evidence. After forensic images were taken from company and personal laptops of the individuals, a large number of electronic and hard copy documents and emails were produced by the defendants. When Plaintiff did not receive all the information it demanded, it obtained a Preliminary Injunction which ordered defendants to produce additional documents, in paper or electronic form, and barred defendants from making sales for one year to any of the plaintiff’s customers for which the defendants had taken documents which plaintiff claimed were confidential. Defendants argued that the information they took was not confidential.
Thereafter, the Court held an evidentiary hearing to determine whether the defendants had violated the terms of the Preliminary Injunction. At the hearing, certain individuals testified that they had complied with the mandates included in the Preliminary Injunctions, but one of the individuals, who had earlier submitted an affidavit supporting compliance, testified that the affidavit she had submitted was not true and that she was threatened by another defendant to submit false information and not to be forthcoming in her testimony.

Ruling of the Court
Based largely on this testimony, the Court found that the defendants had violated the terms of the Preliminary Injunction by:

• selling certain products to a customer of the plaintiff;
• spoliating evidence which defendants knew or reasonably should have known might be relevant to the claims in this matter;
• intentionally failing to produce certain documents;
• deleting emails after being ordered to produce them;
• failing to image and produce several USB drives which were used by defendants after the litigation commenced; and
• committing fraud on the Court by falsely claiming that defendants had complied with the Injunction when the facts demonstrated that documents were withheld, electronically-stored data relating to the claims in the complaint were not preserved, emails were deleted on certain defendants’ computers, and personal computers and devices were not turned over, in spite of representations to the contrary by the defendants’ attorney to the Court.

The Court stated that defendants’ acts described above “‘set in motion [an] unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate [this] matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense.’ [citation omitted] The defendants’ actions noted above show a blatant disregard for the judicial process and a disrespect of this Court and its orders.”

Sanctions
Relying on its inherent power to take remedial action in response to the defendants’ deliberate violation, the Court found that sanctions were in order. The Court initially ruled that the appropriate sanctions were: 1) entry of default against the defendant company and certain individual defendants with respect to some of the claims alleged in the Complaint, 2) dismissal of the defendant’s counterclaims, and 3) attorneys’ fees and costs. See Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320 (January 31, 2014). In a subsequent decision, the Court denied the request of the plaintiff to default the defendants on all counts of the Complaint, but issued a default against the defendants as to the plaintiff’s claims that allege that “the defendants took confidential, proprietary information with them when they left Pacific Packaging and that they used that information in seeking to attract customers that had been Pacific customers.” See Pacific Packaging Products, Inc. v. James Berenboim, et al., Middlesex Superior Court, C.A. No 09-4320 (April 1, 2014).

Takeaways
Although defendants’ actions in this case could be considered extraordinary, the decision is a good lesson to companies and their inside and outside attorneys about how seriously courts view their orders, and why employees, company counsel and outside counsel should diligently monitor compliance. This includes taking all reasonable measures to preserve documents and other information, both electronic and hard copies, that reasonably may be relevant to the claims alleged. This means that it is critical that counsel send litigation-hold letters to their clients and follow up to insure that this information is located and preserved properly.

This case also illustrates how judges have become savvy in understanding the technicalities of electronically stored information (ESI), which has become increasingly predominant in litigation in general and in trade secrets and non-compete cases in particular. It provides a good lesson to counsel and employees about how critical it is for companies and their attorneys to take the necessary steps immediately to inventory, analyze and preserve ESI, including taking forensic images of all relevant information that may be on company computers and USB drives, as well as employees’ personal computers.

Such measures are necessary to minimize the risks of receiving the draconian sanctions issued by the Court in this case.