A federal judge has sanctioned a leading developer of "flash drive" technology for its mishandling of electronic discovery in what the judge called a "David and Goliath-like" struggle.
Southern District Judge William H. Pauley ruled that he would instruct the jury to draw a negative inference from the fact that SanDisk Corp., a company with a market capitalization of $8.7 billion, had lost the hard drives from laptop computers it issued to two former employees who are the plaintiffs in Harkabi v. Sandisk Corp., 08 Civ. 8230.
SanDisk must be "mortif[ied]" by the ex-employees' argument that the company, as a leading purveyor of electronic data storage devices, cannot claim that it made an "innocent" mistake in losing the hard-drive data, Pauley wrote.
That argument is on target, the judge concluded, noting that SanDisk's "size and cutting edge technology raises an expectation of competence in maintaining its own electronic records."
Pauley also awarded $150,000 in attorney's fees to the two plaintiffs, Dan Harkabi and Gidon Elazar, because of delays the company caused in producing their e-mails during the 17 months they worked for SanDisk.
In 2004, the plaintiffs sold a software company they had founded in Israel to SanDisk for $10 million up front. An additional $4 million was to be paid depending on the level of sales SanDisk realized over the next two years on products "derived" from technology developed by the Israeli company. As part of the deal, Harkabi and Elazar moved to New York and began working for SanDisk.
At the end of the two-year period, SanDisk contended the threshold for the Israeli software developers to claim their "earn-out" fee had not been met, and offered them $800,000. When the developers continued to demand the full $4 million, SanDisk ended their employment.
One of the key issues in the suit is whether a SanDisk flash drive called "U3" contained software "derived" from a product the two plaintiffs developed in Israel.
Flash drives are compact data storage devices about the size of a stick of gum used to transport data from one computer to another.
The Israeli company had developed software that could be used to encrypt flash drives so the data would be secured for personal use only. The owner would not be able to transfer copyrighted data such as movies, computer applications, books or other materials.
The two developers claim that SanDisk sold 15 million U3 flash drives. Under their contract, SanDisk had to sell 3.2 million flash drives utilizing an encryption system derived from the product plaintiffs had developed in Israel.
The developers contend that the U3 is derived from the Israeli product. SanDisk disputes any connection.
As the dispute began to heat up in 2007, the developers' lawyers at the time asked SanDisk to preserve information on their client's laptops.
SanDisk's in-house counsel issued a "do-not-destroy" letter, and the two laptops were stored in a secure area for more than a year. But at some point a decision was made to re-issue the two laptops to other employees after the data from the hard drives had been separately preserved.
SanDisk's response in the initial round of electronic discovery was a declaration from an in-house lawyer that "I have no reason to believe" the April 2007 "do-not-destroy" memo "was not fully complied with."
SanDisk also produced 1.4 million documents, which it described as "everything" found in response to the developers' electronic discovery demands. Six weeks later, however, the company acknowledged it was unable to retrieve the data from the laptops' hard drives. But the two developers created their own software to analyze the 1.4 million documents received in discovery and concluded that much of their e-mail correspondence had not been turned over, according to the opinion.
SanDisk subsequently conceded that it had not turned over all of the developers' e-mails, but has since begun the process of retrieving the missing e-mails from backup files.
A negative inference with regard to the data on the lost hard drives, Pauley concluded, is warranted because "the undisputed facts reveal a cascade of errors, each relatively minor," which added to a significant discovery failure.
The loss of the hard-drive data has deprived the two developers of the opportunity to present "potentially powerful evidence" on the key issue of whether the U3 flash drive was derived from encryption software developed by the pair in Israel.
Although the missing e-mails eventually will be available at trial, Pauley concluded, SanDisk should nonetheless pay the developers $150,000 to cover their added legal costs for discovery.
SanDisk's "misrepresentations" about its initial electronic document production, he wrote, "obscured the deficiencies and stopped discovery in its tracks."
He added, "But for plaintiffs' forensic analysis and their counsel's persistence those deficiencies may not have come to light."
Charles E. Bachman, of O'Melveny & Myers, who represented SanDisk, said the company would have no comment.
Harkabi and Elazar were represented by Charles A. Stillman and Daniel V. Shapiro of Stillman, Friedman & Shechtman.
