Carmichael v. Separators, Inc.

• Decision Date: 08 May 2020
• Docket Number: Court of Appeals Case No. 19A-PL-1821
• Citation: 148 N.E.3d 1048
• Parties: Robert CARMICHAEL, Appellant-Defendant, v. SEPARATORS, INC., Appellee-Plaintiff.
• Court: Indiana Appellate Court

148 N.E.3d 1048

Robert CARMICHAEL, Appellant-Defendant,

v.SEPARATORS, INC., Appellee-Plaintiff.

Court of Appeals Case No. 19A-PL-1821

Court of Appeals of Indiana.

FILED May 8, 2020

Attorneys for Appellant: Margaret M. Christensen, Andrew M. Pendexter, Dentons Bingham Greenebaum, LLP, Indianapolis, Indiana

Attorneys for Appellee: Christopher C. Murray, John A. Drake, Ogletree Deakins Nash Smoak & Stewart, PC, Indianapolis, Indiana

Riley, Judge.

STATEMENT OF THE CASE

[1] Appellant-Defendant, Robert Carmichael (Carmichael), appeals following the trial court's entry of default judgment and award of exemplary and compensatory damages against him and his co-defendants, Olice Monday (Monday) and Centrifuge Supplies, Inc. (CSI), (collectively, the Defendants),¹ in favor of Appellee-Plaintiff, Separators, Inc. (Separators).

[2] We affirm.

ISSUES

[3] Carmichael presents this court with four issues, which we consolidate and restate as the following three:

(1) Whether the trial court's entry of a default judgment against Carmichael and his co-defendants as a sanction for spoliation of evidence in contempt of its discovery orders was clearly erroneous;

(2) Whether the trial court properly denied Carmichael's motion for summary judgment; and

(3) Whether the trial court's award of exemplary and compensatory damages was clearly erroneous.

FACTS AND PROCEDURAL HISTORY

[4] Separators was founded in 1985 and provides its customers with centrifuge services, equipment, and parts. Over the course of its corporate existence, Separators amassed a collection of reference materials pertaining to the provision and maintenance of centrifuges to its customers (the technical library). The technical library contained hundreds of original equipment manufacturer manuals (the manuals), some of which had been modified with notes regarding specific alterations to Separators' customers' centrifuges. Separators had converted the technical library to an electronic format, a laborious process that entailed manually scanning thousands of pages of documents. The technical library was password protected, and Separators did not allow the general public or its competitors to access it. In addition to the technical library, Separators stored other types of data on its computer network, including customer parts lists, customer quotes, and other sales and financial information. The Separators' employee handbook provided that employees were not to copy any of Separators' data files without the company's permission.

[5] From 2005 to 2013, Carmichael was the parts manager for Separators, a job which entailed interfacing with Separators' customers on a regular basis. Separators had hired Monday in 2002, and he became Carmichael's assistant in the parts department. Neither Carmichael nor Monday signed a non-compete, non-solicitation, or confidentiality agreement with Separators. In December 2012, Carmichael formed CSI as a direct competitor to Separators. Carmichael was the president and sole shareholder of CSI. Carmichael formally resigned from Separators on March 8, 2013. Before he left the company, Carmichael copied hundreds of manuals from the technical library and subsequently copied those electronic files onto his CSI computer, all without Separators' consent.

[6] After Carmichael left, Monday became the manager of Separators' parts department. On February 20, 2015, Monday left Separators to begin working for CSI as its vice president. Before he left Separators, and without the company's consent, Monday copied thousands of data files relating to Separators' business, including the manuals, sales documents, service parts lists, and customer quotes, onto a Seagate USB Device (Seagate USB) and a Pockey USB Device (Pockey USB). On February 23, 2015, Monday's first day of work at CSI, Monday downloaded the data from the Seagate and Pockey USBs onto his CSI computer. Monday had internet-based data backup for his CSI computer on an ASUS WebStorage account (ASUS account), and he had another internet-based data storage account with Microsoft OneDrive (OneDrive account). Carmichael used a Western Digital Passport drive (WDP drive) to back-up financial data from his CSI computer prior to moving to an internet-based accounting system.

[7] On September 14, 2015, Separators filed its Verified Complaint for Injunctive Relief and Damages (Complaint) alleging that the Defendants had copied and taken "Separators' files containing proprietary and trade secret information including, but not limited to, parts lists, customer lists, supplier information, custom parts drawings, manuals, and financial reports[,]" and thus had "accessed, copied and used a significant portion of Separators' technical, commercial, and financial library." (Appellant's App. Vol. III, pp. 40, 42). Separators raised claims of misappropriation of trade secrets pursuant to the Indiana Uniform Trade Secrets Act (IUTSA) (all Defendants); breach of fiduciary duty/duty of loyalty and computer trespass (Carmichael and Monday); and tortious interference with business relationships, unfair competition, unjust enrichment, conversion, theft, and civil conspiracy (all Defendants). In conjunction with its Complaint, Separators sought a temporary restraining order (TRO) on CSI's unfairly competitive business activities. Separators also sought orders directing the preservation of evidence within the Defendants' possession or control and for expedited discovery.

[8] On September 14, 2015, the trial court issued a TRO that enjoined the Defendants from using Separators' trade secrets and confidential information to compete against Separators. The trial court also issued its Order Preserving Electronic Evidence (OPEE) that directed the Defendants to

preserve all electronically stored date in their possession, custody, or control relating to Separators, including emails or data that exists or existed (before being deleted) on any computer, laptop, PDA, backup tape, CD, DVD, USB drive, cloud storage, or other media (including all metadata and tags).

(Appellant's App. Vol. III, p. 157). The trial court ordered the Defendants to comply with Separators' expedited discovery requests by September 22, 2015, and it set a hearing on Separators' motion for a preliminary injunction for September 23, 2015.

[9] On September 14, 2015, Carmichael was personally served with the Complaint, TRO, and OPEE at 6:00 p.m. Monday was with Carmichael when Carmichael was served. At 6:03 p.m. on September 14, 2015, approximately 100 files related to Separators were deleted from the Pockey USB. At 7:10 p.m. on September 14, 2015, after Monday had been personally served with the same documents, 1063 items related to Separators were deleted from the Seagate USB. Sometime after September 14, 2015, Carmichael deleted approximately twenty emails from his CSI computer that were potentially related to Separators.

[10] On September 23, 2015, the trial court entered a stipulated preliminary injunction order (PI) which enjoined the Defendants from

destroying, erasing, or otherwise making unavailable for further proceedings in this matter, any records or documents (data or information maintained in computer media, including Defendants' personal computers, drives, email, and other media) in Defendants' possession, custody, or control that were obtained from or derived from any Separators [ ] documents, data, records, or information.

(Appellant's App. Vol. III, p. 160). The PI also ordered the Defendants to produce their computers and electronic data storage devices, which, according to an agreed inspection order (AIO) entered in conjunction with the PI, included "any and all devices and media used to store electronic information[.]" (Appellant's App. Vol. III, p. 164). These items were to be produced to computer forensics expert Rebecca Green (Green) for inspection. Between September 22, 2015, which was the day before the hearing on Separators' motion for a preliminary injunction, and September 24, 2015, the day that the Defendants' computers, electronic data storage devices, and media were to be turned over to Green for inspection, at least 932 files relating to Separators were deleted from Monday's CSI computer.

[11] On September 24, 2015, in order to comply with the TRO, OPEE, PI, AIO, and the trial court's order granting Separators' expedited discovery requests (collectively, the discovery orders), Carmichael and Monday met with Green at the CSI business premises. While there, Green specifically asked Carmichael and Monday whether they had any internet-based data storage that was implicated by the discovery orders. Carmichael and Monday disclosed their internet-based accounting system and produced their CSI computers and the Seagate USB, but they failed to produce the WDP drive and failed to disclose the ASUS and OneDrive accounts.² On October 5, 2015, the day before the Pockey USB was scheduled to be turned over to Green for inspection, approximately 3000 images were uploaded onto the USB, rendering the previously-deleted data irretrievable.

[12] As a result of her forensic investigation, Green discovered the deletions from the Seagate and Pockey USBs and the CSI computers, the existence of the undisclosed internet-based data storage sites and the WDP drive, and the overwriting of deleted data by images on the Pockey USB. On February 11, 2016, Separators filed a motion for order to show cause seeking to have the Defendants held in contempt and sanctioned for violating the discovery orders by destroying and concealing evidence relevant to its claims. Among its requests for relief, Separators sought a default judgment against the Defendants on several of its claims the prosecution of which it alleged had been materially impeded by the Defendants' actions.

[13] On March 16, April 26, and May 17, 2016, the trial court held hearings on Separators' rule to show cause motion. The Defendants did not dispute that they had copied Separators' manuals before leaving the company and had...