Seagate Technology, LLC v. Western Digital Corp., No. A12-1944 (Minn. Oct. 8, 2014) [click for opinion]

Sining Mao (“Mao”) was a former director at Seagate, a hard drive company, who worked on technology to improve storage capacity. When Mao joined Seagate, he signed an employment contract that included a confidentiality provision and an arbitration provision. Eventually, Mao left Seagate and joined Seagate’s competitor, Western Digital Corp. (“Western Digital”).

Soon thereafter, Seagate initiated a lawsuit against Western Digital and Mao alleging claims (1) against Mao and Western Digital for the misappropriation of eight trade secrets; (2) against Mao for breach of contract, breach of fiduciary duty, and breach of loyalty; and (3) against Western Digital for tortious interference with contract. The case was sent to arbitration based on the provision in Mao’s employment contract.

Before the arbitration hearing began, Seagate brought a motion for sanctions against Western Digital and Mao based on an alleged fabrication of evidence. Specifically, Seagate alleged that Mao had inserted additional PowerPoint slides containing information on three of Seagate’s claimed trade secrets (Trade Secrets 4-6) into his copy of a presentation that he had given at a conference while employed by Seagate to make it appear as if this information had been presented in public, and therefore did not qualify as trade secrets.

Seagate requested an order precluding Western Digital and Mao “from presenting any defense to the trade secret misappropriation claims asserted against them, including barring [Western Digital and Mao] from (1) disputing the validity and misappropriation of any of Seagate’s eight asserted trade secrets, and (2) disputing Western Digital’s use of Seagate’s eight asserted trade secrets.” Seagate also requested compensation for “the costs and attorneys’ fees it was forced to incur to investigate and expose the document fabrication and to bring this motion to remedy it.” Western Digital and Mao responded by requesting sanctions against Seagate to “compensate the Claimants for the unnecessary fees and costs incurred in defending against Seagate’s frivolous charges.” Western Digital and Mao also asked the arbitrator to defer consideration of the sanctions motions until after the arbitrator had heard evidence “in the context of the full arbitration hearing.”

The arbitrator granted Western Digital’s and Mao's request to defer, and Western Digital and Mao raised defenses alleging that Trade Secrets 4-6 were not “secret” at all, based on Mao’s public PowerPoint presentation. Seagate responded that the presentation was fabricated and that Mao had inserted the PowerPoint slides “disclosing” the three trade secrets after the actual presentation had been given in an effort to help bolster his and Western Digital’s defense. The arbitrator agreed, finding that “[t]he fabrications were obvious.”

As a sanction, the arbitrator precluded Mao and Western Digital from defending against Seagate’s claims regarding those three trade secrets. As such, the arbitrator entered judgment against Mao and Western Digital, even though the arbitrator found Seagate had failed to prove that the other five “trade secrets” actually met the legal definition of a trade secret. Ultimately, the arbitrator awarded Seagate $525 million in compensatory damages, plus interest. Mao and Western Digital challenged the award, arguing that the arbitrator had no authority to level such a heavy sanction.

The award was vacated in part by the district court and then reinstated by the court of appeals. Mao and the Western Digital entities separately sought review of the reinstatement decision. They argued that the arbitrator’s punitive sanctions, which precluded any evidence or defense and entered a judgment of liability on certain claims, should have been vacated under Minnesota law because the arbitrator exceeded his authority by issuing those sanctions and substantially prejudiced Mao and Western Digital by refusing to hear evidence material to the issue.

The Minnesota Supreme Court ultimately sided with Seagate, finding that the arbitration agreement, and the AAA rules incorporated by the agreement, provided the arbitrator the authority to grant “injunctions or other relief” and “any remedy or relief that would have been available to the parties had the matter been heard in court including awards of attorney’s fees and costs.” The court held that punitive sanctions fell within the ordinary meaning of relief, could be properly construed as a remedy, and would have been available to the parties had the matter been heard in court. The arbitrator thus did not clearly exceed his authority in awarding punitive sanctions. The court also found that the arbitrator had not failed to hear material evidence, as it had allowed Mao and Western Digital to present their case in full at the hearing, but gave their evidence limited use and weight in constructing the final award. The award was thus affirmed.

Andray Napolez of the Chicago office contributed to this summary.