Beard Research, Inc. v. Kates

• Decision Date: 29 May 2009
• Docket Number: Civil Action No. 1316-VCP.
• Citation: 981 A.2d 1175
• Parties: BEARD RESEARCH, INC. and CB Research & Development, Inc., Plaintiffs, v. Michael J. KATES, ASDI, Inc., Advanced Synthesis Group, Inc., Alan Blize, Garry Smith, Michael Wagaman, Stephen Jones, and Pfizer, Inc., Defendants.
• Court: Court of Chancery of Delaware

981 A.2d 1175

BEARD RESEARCH, INC. and CB Research & Development, Inc., Plaintiffs, v. Michael J. KATES, ASDI, Inc., Advanced Synthesis Group, Inc., Alan Blize, Garry Smith, Michael Wagaman, Stephen Jones, and Pfizer, Inc., Defendants.

Civil Action No. 1316-VCP.

Court of Chancery of Delaware.

Submitted: February 2, 2009.

Decided: May 29, 2009.

R. Karl Hill, Esquire, Patricia P. McGonigle, Esquire, Seitz, Van Ogtrop & Green, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.

John A. Elzufon, Esquire, Elzufon, Austin, Reardon, Tarlov & Mondell, P.A., Wilmington, Delaware, Attorneys for Defendants Michael J. Kates, Garry Smith, Michael Wagaman, Steven Jones, and Advanced Synthesis Group, Inc.

Barry M. Willoughby, Esquire, John W. Shaw, Esquire, Elena C. Norman, Esquire, Young, Conaway, Stargatt & Taylor, LLP, Wilmington, Delaware, Attorneys for Defendants ASDI, Inc. and Alan Blize.

OPINION

PARSONS, Vice Chancellor.

This action is currently before me on Plaintiffs' motion for sanctions for alleged spoliation of evidence. In particular, Plaintiffs contend that an ex-employee's laptop computer was irretrievably altered after a duty to preserve that evidence had arisen and that the ex-employee and his subsequent employers are responsible for that alteration. By way of remedy, Plaintiffs urge this Court to grant a default judgment in their favor on Counts I and II of their Complaint for tortious interference with business relations and misappropriation of trade secrets, respectively. Alternatively, Plaintiffs request an adverse inference that the destroyed evidence contained information that would favor their claims. Plaintiffs also seek imposition of attorneys' fees and costs. Defendants vigorously oppose the motion for sanctions.

For the reasons stated in this opinion, I decline to enter a default judgment, but grant in part and deny in part Plaintiffs' request that the Court draw an adverse inference based on the missing evidence. In addition, I order the ex-employee and his new employers to reimburse Plaintiffs for the reasonable attorneys' fees and expenses they incurred in prosecuting their motion for sanctions.

I. BACKGROUND

A. Parties

Charles Beard launched the eponymous Plaintiffs, CB Research & Development, Inc. ("CB") and Beard Research, Inc. ("BR"), to engage in chemical processing for the pharmaceutical industry. CB and BR offered chemistry outsourcing services, such as providing full-time equivalent chemists ("FTEs") for extended periods or for one-off projects involving custom synthesis of compounds. In late 2002, CB, BR, and Pfizer, Inc. ("Pfizer") executed a three-year contract for FTEs and custom synthesis work. In 2002, CB also was developing a catalog of compounds from which companies in the pharmaceutical industry could order material as needed. CB and BR have made a variety of claims against several former employees and their subsequent employers. One of these former employees is Dr. Michael Kates.

Kates left CB and BR and joined Defendant Advanced Synthesis Group, Inc. ("ASG"), and later Defendant ASDI, Inc. ("ASDI"). ASDI was formed in 1997 by Ronald Paloni, who is not a party to this action.¹ Since 2000, ASDI has functioned primarily as a "monomer store" for companies like Pfizer.² The "monomer store" is "a repository of intermediates for Pfizer chemists to call and ask for and then a certain amount is delivered to Pfizer within a 24-hour period of time."³ ASG was formed in 2003 or 2004;⁴ its business was to perform custom synthesis of chemical compounds and to sell chemical compounds through a catalog. ASDI provided management services for ASG.⁵

B. Facts

In 1997, Kates joined CB.⁶ In late 1999, Charles Beard formed BR, and Kates became a BR officer, director, and shareholder, as well.⁷ In mid-2003 and while still employed at CB and BR, Kates purchased a Gateway laptop (the "Gateway" or the "laptop").⁸ Kates used the laptop for business purposes.⁹

From 2003 to early 2004, relations between Kates and Beard deteriorated for reasons not relevant to this opinion. Phone records show that during this period Kates called Defendant Alan Blize approximately seventy times.¹⁰ Although Blize currently is the CEO of ASDI, he previously worked at Pfizer as a "molecular broker"¹¹ where he managed Pfizer's outsourced custom synthesis work, including the work performed by Plaintiffs.¹²

In or around December 2003, Kates took part in the formation of ASG with shareholders of ASDI.¹³ Rather than taking an equity interest in ASG himself, however, Kates had shares listed in his wife's name, because Kates believed Beard was going to sue him.¹⁴ In December 2003, Kates resigned from CB.¹⁵ On February 13, 2004, Kates also resigned from BR.¹⁶ Kates began working at ASG three days later,¹⁷ and shortly thereafter, Pfizer terminated its contract with CB and BR. After Kates resigned from CB and BR, he continued to use the laptop at ASG and ASDI, which were in similar business segments as CB and BR.¹⁸

Sometime between December 2003 and March of 2004, Kates made a PowerPoint presentation to the ASDI board of directors, using the Gateway.¹⁹ The purpose of the presentation was to demonstrate to ASDI what Kates could bring to the table.²⁰ The presentation included, among other things, information about custom synthesis and providing a catalog of compounds.²¹ During the presentation, Blize claims he interrupted Kates and said:

Mike, your previous employer has a catalog of compounds. If you're bringing a catalog of compounds with you or you want to build another one, is there going to be any type of conflict IP [intellectual property]? Are we going to have any issues surrounding this set of compounds? Because you're coming from another company that also offers this component as far as their business model.... I don't need any issues.²²

On May 4, 2005, CB and BR filed a Verified Complaint against Kates, ASDI, ASG, Blize, Dr. Garry Smith, Dr. Michael Wagaman, and Dr. Stephen Jones.²³ On June 21, 2005, CB and BR served their first set of interrogatories and requests for production of documents on Defendants. These requests sought documents kept in electronic form and specifically included email communications among Defendants.²⁴

On October 31, 2005, Kates was laid off from ASG.²⁵ Kates avers he was angered by this development and, therefore, deleted all ASG data and files from the Gateway hard drive and then "emptied" the computer's trash or recycle bin.²⁶ Later, in December 2005, Kates claims the Gateway crashed, and he reformatted the hard drive and reinstalled system software.²⁷ Sometime between December 2005 and August 2006, the Gateway crashed a second time, according to Kates, and he again reformatted the hard drive and reinstalled system software.²⁸ Kates admittedly understood that reformatting the hard drive or installing a new operating system could "wipe[ ] out the old data."²⁹ In August 2006, Kates began his employment at ASDI.³⁰

On May 23, 2006, Plaintiffs filed a Second Amended Verified Complaint (the "Complaint").³¹ Six weeks earlier, Plaintiffs had filed a motion to compel.³² On June 2, 2006, the Court entered an Order directing Defendants to respond to Plaintiffs' discovery, including various requests for documents.³³ On December 21, 2006, Plaintiffs filed a second motion to compel.³⁴ During argument on that motion, Plaintiffs requested direct access to the ASDI and ASG computer databases. In response, Defendants undertook, among other things, to conduct a search of the personal computer of Kates for documents and written communications to and from two different personal email accounts.³⁵

Based on the second motion to compel, the Court directed Defendants' IT expert to meet with Plaintiffs to discuss the method and means of searching the computers and databases.³⁶ That meeting took place on June 8, 2007.³⁷ Plaintiffs objected to Defendants' use of Intelligent Solutions as their IT consultant on the ground that they were an affiliate of ASDI, and, therefore, not independent or disinterested. Nevertheless, Defendants continued to use the services of Intelligent Solutions.

Sometime in 2007, the Gateway crashed for a third time, and Kates attempted to reformat the hard drive and reinstall software as he had done before.³⁸ This time, Kates could not resuscitate the hard drive.³⁹ On September 18, 2007, counsel for Kates and the other Defendants asked Kates how to go about retrieving any emails sent from his personal computer, because Plaintiffs had requested such emails.⁴⁰ Kates responded: "The email[s] were sent from my personal computer. However, when I was laid off from [ASG], the computer was reformatted. There are no emails of any kind on the computer. The computer at this point doesn't even function."⁴¹ After determining that Kates still had the computer, Defendants' counsel warned: "Don't trash it."⁴²

On October 2, 2007, Plaintiffs again unsuccessfully requested access to the Gateway.⁴³ On October 11, 2007, Defendants' counsel sent a letter to CB's counsel noting that Kates, Smith, and Wagaman indicated there was nothing on their personal computers and further advising them that access to any computer would require a Court order.⁴⁴

On or about December 11, 2007, Kates gave his Gateway to Scott Biggers at Intelligent Solutions and asked Biggers to see if he could fix it.⁴⁵ Intelligent Solutions served as ASDI's in-house technology support and, as noted above, also was retained to provide litigation support to Defendants for the electronic discovery in this case. Biggers said that he could not fix the hard drive or even get it to "spin"; he also could not make a "ghost" copy of the drive.⁴⁶ Biggers then ordered and installed a new hard drive, on which he installed a new operating system and software.⁴⁷ Biggers recalls returning the Gateway's original hard drive to Kates.⁴⁸ As for what happened to the original hard drive, Kates swore that:

At this time, I still do not have a specific...