The Federal Circuit recently decided Organik Kimya et al. v. International Trade Commission, Nos. 2015-1774 and 2015-1833, affirming the International Trade Commission’s (“Commission”) decision imposing a default judgment as a sanction for Respondent Organik’s spoliation of evidence and entry of a 25-year limited exclusion order against Organik.

Background

In the underlying investigation, Certain Opaque Polymers, Inv. No. 337-TA-883, U.S. companies, Dow Chemical Co., Rohm and Haas Co., and Rohm and Haas Chemicals LLC (collectively, “Dow”), accused Turkish companies, Organik Kimya San Ve Tic. A.Ş., Organik Kimya Netherlands B.V., and Organik Kimya U.S., Inc. (collectively, “Organik”), of violating Section 337 of the Tariff Act of 1930 by, inter alia, importing into and selling in the U.S. certain opaque polymers allegedly produced using trade secrets misappropriated from Dow. Both Dow and Organik manufacture opaque polymers, which are hollow spheres used as paint additives for interior and exterior paints to increase paint’s opacity. Although Dow’s original complaint also alleged that Organik infringed four Dow patents, Dow withdrew its patent infringement allegations upon the Administrative Law Judge’s (“ALJ”) default judgment against Organik.

The Commission Proceedings

ALJ Pender found that, during the course of discovery, Organik engaged in spoliation of evidence “on a staggering scale.” Dow had alleged that three former Dow employees, now employed by Organik, assisted Organik in developing opaque polymers using Dow’s sensitive and proprietary information, and sought a finding of default based on Organik’s alleged pattern of destroying documents and obstructing discovery.

Subsequent to ALJ Pender issuing an order authorizing examination of several Organik employees’ computers, one employee overwrote his hard drive and backdated his computer’s internal clock, using one program to delete large percentages of his computer’s C and D drives, and another to test whether the deleted information could be recovered. Organik submitted a letter to ALJ Pender asserting that these were simple IT maintenance activities, but he found this explanation to be “a work of fiction,” further stating that Organik acted in bad faith. ALJ Pender also found that the spoliated evidence was relevant to Dow’s allegations of trade secret misappropriation and that its destruction was prejudicial to Dow’s ability to present its case.

Another Organik employee smashed his hard drive with a hammer and threw it away prior to a forensic inspection. And a third employee deleted over 2,000 files and “accidentally” left his computer and storage devices in a bathroom of a highway rest stop. Although the files were recovered, ALJ Pender found this conduct sanctionable because the deletion showed an attempt to “cover up wrongdoing” after he issued a Preservation Order and after Organik received notice of another employee’s “massive spoliation of evidence.”

With respect to all three employees, ALJ Pender found that Organik controlled their company-issued laptops, and should have given its employees a litigation hold notice, rather than improperly leave it up to individual employees to either save or delete files.

Dow moved for sanctions, including a default judgment against Organik. Alternatively, Organik asked ALJ Pender to grant its motion to terminate the investigation by consent order.

After a two-day sanctions hearing, ALJ Pender granted Dow’s motion, to deter future bad conduct and because the significant prejudice caused to Dow warranted the “strongest remedy available.” He also found Organik and its counsel jointly and severally liable for $1,944,379.91 in monetary sanctions. He was particularly troubled by a letter Organik’s counsel wrote to him attempting to cover-up wrongdoing, noting that “[a]ny diligent effort by counsel to check the veracity of the explanations in that letter before it was filed would have revealed them as false. The filing of this letter with the court exacerbated the discovery dispute … increasing the costs and fees.”

On review, the Commission upheld ALJ Pender’s finding of default, affirmed the almost $2 million monetary sanction against Organik and its counsel, and issued a 25-year limited exclusion order and cease and desist order. Commissioner Schmidtlein dissented with respect to the sanctions against Organik’s counsel, finding more information was needed before counsel could be held accountable.

The Commission affirmed the default sanction because Organik had committed extensive discovery abuse. Further, the Commission found that termination by consent order was inappropriate because Organik’s destruction of evidence had disadvantaged Dow with respect to future litigation, and anything short of a default would not serve as a “sufficient deterrent.” The Commission found unavailing Organik’s argument that the spoliated evidence only related to one element of Dow’s trade secret claim, warranting the denial of a default. In addition, under Commission Rules 210.16(a)(2) and 210.33(b)(5), a party may be found in default as a sanction for failure to cooperate in discovery. The Commission also noted that because Organik is in default, it no longer has a right to contest Dow’s allegations.  

With respect to the limited exclusion order, the Commission disagreed with Organik that a number of alleged trade secrets were not secret, and that any exclusion order should be limited to 2 years and to specific products at issue, finding 25 years appropriate because Dow had maintained the secrecy of its opaque polymers for more than 30 years, and Dow’s expert stated that it would have taken Organik “22-25 years” to independently develop and manufacture a comparable product. The Commission also required Organik to obtain an advisory opinion or go through a modification proceeding prior to importing any opaque polymers potentially subject to the exclusion order (instead of simply certifying to Customs that they are not made with Dow’s misappropriated trade secrets).

The Commission found unpersuasive the argument of Organik’s counsel that its due process rights were violated when ALJ Pender held it jointly and severally liable for monetary sanctions because it did not have notice of possible sanctions. The Commission noted that Dow’s sanctions motion cited Commission Rule 210.33(c), which expressly states that attorneys may be liable for discovery abuse sanctions. It also noted that sanctions against counsel were warranted based on ALJ Pender’s finding that counsel’s false letter on behalf of Organik explaining the destruction of evidence violated his discovery orders, obstructed discovery, and exacerbated Dow’s expenses. Additionally, the Commission found that counsel did not fulfill its duty to preserve evidence because it did not take physical possession of the computers whose hard drives the Organik employees destroyed.

Opinion of the Court

Judge O’Malley, writing for the Court, affirmed the Commission’s default judgment sanctions and 25-year limited exclusion order, pursuant to an abuse of discretion standard. The monetary sanctions were not at issue.

With respect to the default judgment, Organik did not challenge the finding that it acted in bad faith in its briefing to the Court. Rather, Organik argued that the Commission erred under Micron Technology v. Rambus, 645 F.3d 1311 (Fed. Cir. 2011), stating that the degree of prejudice to Dow was minimal, and the Commission did not adequately address the efficacy of lesser sanctions. In Micron, the Court addressed a default judgment sanction imposed by a district court under its inherent authority to control litigation and the judicial process, and analyzed the district court’s findings with respect to: (1) bad faith; (2) prejudice to the opposing party caused by the spoliation; and (3) availability or efficacy of lesser sanctions.

Here, the Court found Micron did not apply, instead considering sanctions under the standard of Commission Rule 210.33(b) and Federal Rule 37(b) because ALJ Pender and the Commission based their decisions on Organik’s express disobedience of ALJ Pender’s discovery orders (i.e., not ALJ Pender’s inherent authority). The Court noted that Rule 37(b) permits a court to render a default judgment against a party that fails to obey an order to provide or permit discovery, as Organik did. Further, the Court noted that although a default judgment may seem harsh, the Supreme Court in Nat’l Hockey League v. Metro. Hockey Club, 427 U.S. 639 (1976) explained that the most severe sanctions must be available to district courts in appropriate cases. And this was an appropriate case in light of Organik’s deceptive actions and extensive discovery abuses, which brazenly occurred after explicit orders from ALJ Pender to allow forensic discovery and to preserve documents.

With respect to the 25-year limited exclusion order, the Court found unpersuasive Organik’s argument that a shorter time period should apply because exclusion orders in trade secret misappropriation cases typically last 5-10 years. The Court first noted that the Commission has broad discretion in selecting the form, scope, and extent of the remedy after finding a violation of Section 337. Then the Court found ample support in the record for the 25-year period, relying on Dow’s expert’s opinion. The Court also found that the Commission did not abuse its discretion because it permitted Organik to import products using opaque polymers developed independent of Dow via an advisory opinion or a modification proceeding before the Commission.

Key Takeaways

• Counsel must act diligently and confirm the veracity of any client explanation related to spoliation generally, and certainly prior to making any statements to a judge, or risk being found jointly and severally liable for any resulting sanctions.

• Parties subject to litigation should distribute litigation hold notices to all affected employees, and ensure compliance.

• Pursuant to Commission Rules 210.16(a)(2) and 210.33(b)(5), a party may be found in default as a sanction for failure to cooperate in discovery and comply with a judge’s order.

• The Commission has broad discretion in selecting the form, scope, and extent of the remedy after finding a violation of Section 337.