Hawaiian Airlines, Inc. (HA) filed a Chapter 11 bankruptcy. As part of its potential reorganization, HA provided confidential information to third-parties interested in investing in HA following their execution of a non-disclosure agreement (NDA). The NDA prohibited use of confidential information for any reason other than the potential investment and required the recipient to return or destroy all confidential information once it determined not to pursue an investment. Mesa Air Group (Mesa) expressed interest in the opportunity, had its CFO sign the NDA and received confidential information. However, rather than proceed with the investment Mesa entered into direct competition with HA.
HA sued Mesa for breach of the NDA and Mesa’s attorneys promptly issued a “litigation hold” to Mesa’s three top officers, including the CFO, in order to preserve all relevant documents. Mesa, however, did not make backups of its electronic records or of the hard drives of the computers issued to the three officers. Shortly after learning of the “litigation hold,” the CFO acquired and applied special software to “scrub” the H drive on Mesa’s computer network and on his laptop computers. The CFO engaged in this conduct both before and after submitting a sworn declaration that he had not copied or misused any confidential information and testifying at a hearing during which the court remarked on his lack of credibility.
After learning of the CFO’s conduct, HA moved for the entry of a default judgment as a sanction against Mesa. The court found that the CFO’s destruction of evidence was intentional and, even though there was no evidence that Mesa knew of the CFO’s actions, ruled that his misconduct was attributable to Mesa. The court found that Mesa could (and should) have taken “reasonable, inexpensive and non-burdensome steps” to preserve evidence upon notice of the suit, such as making backups of the hard drives of executives with access to the confidential information. While the court refused to enter a default judgment, it ruled that an adverse inference should be drawn and, accordingly, found that Mesa had misused confidential information and that the misuse was a substantial factor in its decision to compete against HA. Based on these findings, the Court found that damages arising from Mesa’s breach of the NDA totaled $80,000,000 and entered judgment in such amount. (In re Hawaiin Airlines, Case No. 03-0817 (Adv. Pro. No. 06-90026) (D. Haw. Oct. 30, 2007))