Seagate Tech., LLC v. W. Digital Corp., A12–1944.

• Decision Date: 08 October 2014
• Docket Number: No. A12–1944.,A12–1944.
• Parties: SEAGATE TECHNOLOGY, LLC, Respondent, v. WESTERN DIGITAL CORPORATION, et al., Appellants, Sining Mao, Appellant.
• Court: Minnesota Supreme Court

854 N.W.2d 750

SEAGATE TECHNOLOGY, LLC, Respondent

v. WESTERN DIGITAL CORPORATION, et al., AppellantsSining Mao, Appellant.

No. A12–1944.

Supreme Court of Minnesota.

Oct. 8, 2014.

Lewis A. Remele, Jr., Charles E. Lundberg, Mark R. Bradford, Bassford Remele, Minneapolis, MN; and Robert N. Hochman, Sidley Austin LLP, Chicago, IL, for respondent.

Clifford M. Greene, Larry D. Espel, John M. Baker, Greene Espel PLLP, Minneapolis, MN; Lisa S. Blatt, Arnold & Porter, LLP, Washington, District of Columbia; and Michael D. Schissel, Arnold & Porter, LLP, New York, NY, for appellants Western Digital Corporation, et al.

Nathan J. Marcusen, Isaac W. Messimore, Bowman and Brooke LLP, Minneapolis, MN; and George W. Soule, Soule & Stull, LLC, Minneapolis, MN, for appellant Sining Mao.

Katherine L. MacKinnon, Law Office of Katherine L. MacKinnon, P.L.L.C., Saint Louis Park, MN, for amicus curiae Minnesota Chamber of Commerce.

Karl E. Robinson, Sweeney & Masterson, P.A., Saint Paul, MN; and Peter R. Afrasiabi, One LLP, Newport Beach, CA, for amicus curiae Professor Georgene M. Vairo.

Scott Cody, Tarshish Cody, PLC, Chaska, MN; and Professor David Allen Larson, Hamline University School of Law, Saint Paul, MN, for amicus curiae Professor David Allen Larson.

Corey J. Ayling, Douglas M. Carnival, McGrann Shea Carnival Straughn & Lamb, Chartered, Minneapolis, MN, for amicus curiae Minnesota High Technology Association.

Alan L. Kildow, Sonya R. Braunschweig, DLA Piper LLP, Minneapolis, MN, for amicus curiae Professor George A. Bermann.

Daniel J. Supalla, Briggs and Morgan, P.A., Minneapolis, MN, for amicus curiae Minnesota Defense Lawyers Association.

Sharon L. Van Dyck, Van Dyck Law Firm, PLLC, Saint Louis Park, MN, for amicus curiae Minnesota Association for Justice.

OPINION

ANDERSON, Justice.

An arbitrator issued an award against appellants Sining Mao, Western Digital Corporation, and Western Digital Technologies, Inc., in an amount exceeding $500 million. The award was vacated in part by the district court and then reinstated by the court of appeals. Mao and the Western Digital entities now separately seek review of the reinstatement decision. Mao and Western Digital argue that the arbitrator's punitive sanctions, which precluded any evidence or defense and entered a judgment of liability on certain claims, must be vacated under Minn.Stat. § 572.19, subd. 1(3)-(4) (2010),¹ because the arbitrator exceeded his authority by issuing these sanctions and substantially prejudiced Mao and Western Digital by refusing to hear evidence material to the controversy. Because we conclude that the arbitrator did not exceed his authority or refuse to hear material evidence as required for vacatur under Minn.Stat. § 572.19, subd. 1(3)-(4), we affirm the decision of the court of appeals reinstating the arbitration award in full.

The arbitration agreement at issue arose out of an employment contract between Mao and his former employer, respondent Seagate Technology, LLC. Seagate designs and manufactures hard disk drives for computers. In his role as senior director for advanced head concepts at Seagate, Mao worked on technology that involves incorporating tunneling magnetoresistance (TMR) into read heads,² which, if done successfully, would allow for vastly improved storage capacity on hard disk drives.

When Mao began working for Seagate, he signed an employment agreement stating, among other requirements, that if he left Seagate, he would preserve the confidentiality of all trade secrets, return all company documents, and not solicit any current Seagate employees for other employment using unfair or deceptive means. The employment agreement also contained the following arbitration clause:

Arbitration: Except as stated below, I agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Hennepin County, Minnesota, in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. The Company and I shall each pay one-half of the costs and expenses of such arbitration, and each of us shall separately pay our counsel fees and expenses.

Mao left Seagate in September 2006 and joined Seagate's competitor, Western Digital Corporation, in October 2006. After Mao joined Western Digital, Seagate commenced a district court action seeking injunctive relief to prevent the disclosure of Seagate's trade secrets and later amended its claim to allege actual misappropriation of trade secrets. Seagate's primary allegation, in essence, was that Mao stole Seagate's trade secrets and confidential information regarding TMR technology and provided it to Western Digital, which Western Digital then used to design and manufacture a TMR read head. Specifically, Seagate made: (1) claims against Mao and Western Digital for the misappropriation of eight trade secrets; (2) claims against Mao for breach of contract, breach of fiduciary duty, and breach of loyalty; and (3) a claim against Western Digital for tortious interference with contract.

Western Digital invoked the arbitration clause of the employment agreement, and the district court stayed the lawsuit pending arbitration. Before the arbitration hearing began, Seagate brought a motion for sanctions against Western Digital and Mao based on alleged fabrication of evidence.³ The fabrication related to documents submitted by Western Digital and Mao, which were intended to prove that three of Seagate's claimed trade secrets, referred to as Trade Secrets 4–6, had been publicly disclosed before Mao left Seagate. Seagate alleged that Mao had inserted additional PowerPoint slides containing information on 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.

In the motion for sanctions based on fabrication, Seagate requested “a sanction commensurate with the severity of the misconduct.” Specifically, 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,” and the arbitrator granted this latter request.

The arbitration hearing was held over 34 days in 2011. The arbitrator found in favor of Mao and Western Digital with respect to claims arising out of Trade Secrets 1–3 and 7–8, concluding that Seagate had failed to prove that the information reflected in these claims met the definition of a trade secret.⁴ Trade Secrets 4–6 were addressed separately, as the arbitrator first reviewed the motion for sanctions based on fabrication and determined that Mao fabricated the disputed slides for the purpose of litigation while working at Western Digital. The arbitrator stated: “The fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides ... at the time of the conferences.” The arbitrator concluded that “Dr. Mao's fabrication of evidence and Western Digital's complicity by submitting the obviously fabricated evidence to the Arbitrator is an egregious form of litigation misconduct and warrants severe sanctions.” The arbitrator then cited Harris Trust & Savings Bank v. Ali, 100 Ill.App.3d 1, 55 Ill.Dec. 186, 425 N.E.2d 1359, 1366 (1981), which states that “[w]hen evidence is ... fabricated, a presumption arises that the cause of action or the defense it was intended to support is without substantial foundation.” (citation omitted) (internal quotation marks omitted). The arbitrator imposed the following sanctions against Western Digital and Mao:

a) Preclusion of any evidence or defense by Western Digital and Dr. Mao disputing the validity of Seagate's asserted trade secrets 4, 5, and 6;

b) Preclusion of any evidence or defense by Western Digital and Dr. Mao regarding misappropriation by Western Digital and Dr. Mao of Seagate's asserted trade secrets 4, 5, and 6;

c) Preclusion of any evidence or defense by Western Digital disputing that it has used or is using Seagate's asserted trade secrets 4, 5, and 6 in Western Digital's manufactured TMR read heads; and

d) Entry of judgment against Western Digital and Dr. Mao of liability for misappropriation and use of Seagate's asserted trade secrets 4, 5, and 6.

After determining that Seagate had established that Trade Secrets 4–6 qualified as trade secrets and, consistent with the sanctions, that these trade secrets had been improperly used by Western Digital, the arbitrator found in favor of Seagate on its claims arising out of Trade Secrets 4–6. The arbitrator also found that Mao's testimony, in part due to the fabrication of evidence, lacked credibility and that Mao had breached his employment contract by...