News & Updates

Spoliation and the $9 Billion Verdict

In April 2014, a Louisiana jury awarded $1.4 million in compensatory damages and $9 billion – that’s right, billion – in punitive damages against Takeda, a Japanese pharmaceutical company and manufacturer of Actos, a drug used to combat diabetes. The plaintiff, a diabetic, alleged that Actos caused him to develop bladder cancer, and the jury overwhelmingly agreed.

I don’t know enough about this case, or any other case alleging that Actos causes cancer, to know whether the jury got it right here. The punitive damage award is obviously too large – it’s roughly 6,100 times the amount of the compensatory award – and it won’t stand.

The $9 billion award, however, followed a jury instruction that Takeda had destroyed evidence in bad faith. Judge Rebecca F. Doherty of the United States District Court for the Western District of Louisiana instructed the jury that she concluded spoliation had occurred, and further instructed that the jury was “free to infer those [destroyed] documents and files would have been helpful to the plaintiffs or detrimental to Takeda.” What is interesting to me is not the size of the award that followed this instruction, but the evidence relied on by Judge Doherty to justify the instruction.

The key to Judge Doherty’s ruling was her conclusion that Takeda had destroyed files belonging to 46 custodians. These 46 custodians had been employed by Takeda in Japan, United States, and Europe. Each of them had left Takeda in 2011 or earlier. The breakdown of the 46 custodians by year of departure is as follows:

Year of Departure
2011 or later
2007-2010
2002-2006
2001 or earlier
# of Custodians
1
14
26
5

The destruction of files of one custodian, in particular, drew the judge’s ire.  That custodian, Katsuhisa Saito, had held the position of Senior Director, Pharmaceutical Development Division at Takeda Japan.  Judge Doherty cited the “select and methodical destruction” of documents belonging to Mr. Saito and those who reported directly to him as evidence of Takeda’s bad faith.

But consider this:  Mr. Saito left Takeda in 2004.  In contrast, the very first lawsuit against Takeda alleging that Actos causes bladder cancer was not filed until 2011.

Unfortunately for Takeda, it had been the target of other product liability lawsuits involving Actos before 2011.  The earliest such lawsuit was filed in 2002, and in response, Takeda had issued a broadly worded litigation hold, stating:

Until further notice, you are instructed to preserve any and all documents and electronic data which discuss, mention, or relate to Actos®.  This means do not destroy, delete, throw away or otherwise discard any such documents or electronic data.

The 2002 lawsuit did not allege that Actos caused bladder cancer.  Nevertheless, in light of the 2002 litigation hold, Judge Doherty ruled that Takeda should have preserved all documents, including the documents belonging to Mr. Saito and the other custodians who left Takeda after 2002.

There is no question that Takeda failed to take adequate steps to implement the litigation hold.  Judge Doherty’s decision does not explain whether Takeda’s failure to implement the litigation hold was intentional or negligent, apparently because Takeda did not provide an explanation.  But the opinion does raise the following questions, among many others.

  1. Is a finding of “bad faith” appropriate in this case when the document hold was issued in response to a different case?
    At the time Mr. Saito left the company in 2004, Takeda did not know that 7 years later, it would be the subject of lawsuits alleging that Actos causes bladder cancer.  Is it fair to say in this lawsuit, filed in 2011, that Takeda’s destruction of Mr. Saito’s files in 2004 was done in “bad faith”?  How can Takeda “selectively and methodically” have destroyed documents if it did not know that those documents would become an issue in this lawsuit, filed 7 years after the destruction?  Or is the “bad faith” finding justified because Takeda itself recognized the need to preserve documents but ignored its obligations?  Does it matter – or should it matter – that both cases allege product liability claims?
  2. What if the 2002 hold had not been issued?
    The key to Judge Doherty’s “bad faith” finding is the 2002 litigation hold.  What if Takeda hadn’t issued that hold?  Would Judge Doherty have had a basis for ruling that Mr. Saito’s documents should have been subject to a hold in 2004?  Alternatively, what if the litigation hold issued in 2002 had not been so broadly worded, but specifically limited to the malady at issue in the 2002 lawsuit?
  3. How broadly – or narrowly – should you craft a litigation hold?
    The decision in 2002 to put a litigation hold on all documents related to Actos was a logical one.  But going forward, will companies err on the side of drafting litigation holds that are more narrow in scope to avoid a similar outcome?

No doubt mistakes were made.  But a spoliation instruction to the jury allows the jury to infer that had these documents been available, they would have shown that Takeda knew of the causal connection between Actos and bladder cancer.  As proven by the $9 billion verdict, the ability to draw such an inference is powerful.  The question is whether such a powerful tool should have been handed to the jury in this instance.

A copy of Judge Doherty’s amended ruling dated June 23, 2014, regarding her finding of spoliation can be found here.

HHS Bulletin Allows COBRA Qualified Beneficiaries to Enroll in the Health Insurance Marketplace for 60-Day Special Enrollment Period

Signing up for COBRA continuation coverage may be a trap for the unwary, as shown by a bulletin issued by the U.S. Department of Health and Human Services (HHS) in May, which is available here.

The HHS bulletin confirms that before signing up for COBRA coverage, employees should consider carefully the impact of enrolling in COBRA on their ability to enroll in health plans through the Affordable Care Act’s federally-facilitated Marketplace Exchanges. In many cases, Marketplace coverage may be less expensive than COBRA coverage, but if an employee signs up for COBRA coverage he may not be eligible to switch to Marketplace coverage for many months.

In general, individuals may only enroll in Marketplace health coverage during open enrollment periods. The first open enrollment period closed in March 2014, and there will not be another open enrollment period until November 2014. Regulations under the Affordable Care Act provide that individuals may also enroll in Marketplace coverage if they qualify for a Special Enrollment Period. There are two Special Enrollment Periods related to COBRA coverage: (1) when an individual experiences a COBRA qualifying event, such as the termination of employment; and (2) when an individual’s COBRA coverage is exhausted, generally after 18 months. Cancellation of COBRA coverage for failure to pay premiums does not give rise to a Special Enrollment period. Thus, if an individual signs up for COBRA, he may not be entitled to switch to Marketplace coverage until the next open enrollment period (or when the individual’s COBRA coverage period is exhausted.)

The U.S. Department of Labor has published a new COBRA Model General Notice and Model Election Notice that explain to plan participants the impact of COBRA coverage on the ability to enroll in Marketplace coverage.

In addition to ensuring that COBRA notices are updated, employers that offer reimbursement of COBRA premiums as part of severance agreements should consider informing employees of the alternative of enrolling in Marketplace coverage and offering reimbursement of Marketplace coverage as an alternative severance benefit.

Leaves of Absence: Ten Common Pitfalls

Complying with the varying requirements of the numerous federal, state and local laws that govern employee leaves of absence in California can be difficult for employers and often raises operational challenges. To assist Bay Area non-profit organizations in navigating the complex web of leave laws, Susan Ansberry made a presentation on Leaves of Absence: Ten Common Pitfalls at the Hood & Strong Annual Human Resources Compensation and Benefits Seminar in June. You can see the ten common pitfalls Susan discussed here.

Customer Lists and the Distinction Between “Solicit” and “Announce”

The trade secret question asked most often by clients is:  can I use my customer list after moving to a new job?

We are asked this – or some variation on this – question from individuals contemplating a change in employment, from companies about to hire a new employee, as well as from companies losing a key employee (or employees) to a competitor.  The frequency of the question is not surprising, because every business relies on its customers, every individual relies on his or her contacts to advance their career, and everyone wants to protect its customer base from competitors.

Read more...

The lawyerly answer is: “it depends.”  Important in each situation is the context, including the nature of the business and the type of customer list at issue.  But here are five general principles to keep in mind.

  1. A customer list can be a trade secret.
    A customer list is entitled to protection under California law if it derives “independent economic value” from not being generally known, and the owner undertakes reasonable efforts to maintain its secrecy.  So ask yourself this question about your customer list:  how easy would it be to duplicate the list?  Also important is the way in which the list was generated.  Was it generated by a number of different employees over a number of years, or is it a personal list of industry contacts that you compiled over the course of your career?
  2. Even if the customer list is a trade secret, you can use the list to “announce” your new job.
    Trade secret law prohibits the “use” of another’s trade secret.  But in California, you can announce your change in employment without running afoul of trade secret laws.  So even if the customer list at issue is a confidential list belonging to the former employer, the law permits you to announce your new business affiliation to those customers.
  3. But you may not use your former employer’s confidential customer list to “solicit.”
    You can announce, but you may not solicit.  According to the California Supreme Court, “solicit” means asking for with earnestness, endeavoring to obtain, appealing to, or inviting.  So you may not “invite” the customer to do business with you, or appeal to the customer to send you business.
  4. “Solicit” does not include the willingness to respond to an invitation.
    While “solicitation” is prohibited, if a customer asks you to make a proposal, you can respond without running afoul of the law.  Of course, you must take steps to ensure that in responding to the customer’s request for a proposal, you are not using any other trade secrets of your former employer, such as confidential cost or pricing information.
  5. Remember, “solicit” is in the eye of the beholder.
    Even if the law permits you to announce your departure to the customers on your former employer’s confidential list, keep in mind that the line between “announce” and “solicit” is often blurred.  And even if you are vindicated in the end, vindication may come at a significant cost in attorneys’ fees.

Ideas Are Protectable As Trade Secrets

In Silvaco Data systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), the Court of Appeals described the difference between a patent and a trade secret as follows:

The sine qua non of a trade secret … is the plaintiff’s possession of information of a type that can, at the possessor’s option, be made known to others, or withheld from them, i.e., kept secret. This is the fundamental difference between a trade secret and a patent. A patent protects an idea, i.e., an invention, against appropriation by others. Trade secret law does not protect ideas as such. Indeed a trade secret may consist of something we would not ordinarily consider an idea (a conceptual datum) at all, but more a fact (an empirical datum), such as a customer’s preferences, or the location of a mineral deposit. In either case, the trade secret is not the idea or fact itself, but information tending to communicate (disclose) the idea or fact to another. Trade secret law, in short, protects only the right to control the dissemination of information.

Read more...


Seizing on the sentence, “[t]rade secret law does not protect ideas as such,” the losing defendant in Altavion v. Konica Minolta Systems Laboratory Inc., ___ Cal. App. 4th ____ (2014), argued that design concepts – i.e., the ideas – underlying the plaintiff’s digital stamping technology was not protectable as a trade secret.
 
The Court of Appeal in Altavion soundly rejected the defendant’s arguments, and upheld the trial court’s finding of misappropriation. Trade secret law protects “information.” Civ. Code § 3426.1(d). Unlike patentable ideas, which must be novel, useful and new, “a trade secret in the broad sense consists of any unpatented idea which may be used for industrial and commercial purposes.” Sinclair v. Aquarius Electronics, Inc., 42 Cal. App. 3d 216, 222 (1974) (citation omitted). In other words, whether an idea is patentable or not is irrelevant; the key is whether the idea itself has been kept secret.
 
The evidence at trial in Altavion was that the trade secrets at issue were not disclosed to anyone other than the defendant, and that the disclosure to the defendant was subject to an NDA. Not only did the plaintiff testify that he knew of no other similar technology at the time his company made a significant investment to develop it, but the Court of Appeal found that the trial court could reasonably infer that the trade secrets were not generally known from the fact that the defendant obtained patents based on the technology.
 
Altavion confirms the critical importance of the plaintiff’s ability to demonstrate that the trade secret was not generally known and that the plaintiff took reasonable steps to maintain its secrecy. Carefully employed, trade secret laws can be an important tool for protecting commercially valuable information and should not be overlooked.

Archives

“I have relied on Folger Levin attorneys for my own and my companies’ most difficult challenges. While anyone can tell me what the law is, far more scarce are the qualities that characterize Folger Levin: judgment, a paramount focus on relationships, and fierce loyalty to clients.”

Jon Sobel, CEO, Sight Machine, and former General Counsel, Yahoo! Inc. and Calera, Inc.