Flexport, Inc. v. Freightmate AI, Inc., et al.

Background

Flexport alleged that former employees Yingwei (Jason) Zhao and Bryan Lacaillade misappropriated trade secrets, breached contracts, and breached fiduciary duties while launching Freightmate AI, Inc. During their employment, both had agreed to protect Flexport’s proprietary information and to return or delete company materials when their employment ended.

The record showed that Zhao transferred approximately 2,000 Flexport shipping-document files to personal and Freightmate storage accounts in May 2024. In July 2024, Zhao, Lacaillade, and another Freightmate employee deleted Flexport materials from accounts and devices. After Flexport sent letters on September 6, 2024, concerning alleged intellectual-property and contractual violations, additional Flexport materials were deleted from devices and accounts.

Flexport moved for sanctions under Federal Rule of Civil Procedure 37(e), which addresses the loss of electronically stored information that should have been preserved for litigation. Flexport requested measures allowing it to present evidence and arguments about the deletions, limiting defense arguments based on the absence of direct evidence, and awarding attorneys’ fees and costs. The defendants argued that they acted appropriately, including by creating a “clean room,” and that Flexport’s September letter could reasonably have been understood as requesting deletion of confidential Flexport materials.

Preservation duty and lost information

The court held that Flexport did not prove that litigation was reasonably foreseeable in December 2023, when Lacaillade told the group to review their offer letters, or in February 2024, when Lacaillade consulted an intellectual-property lawyer. The court explained that trying to avoid litigation is not the same as reasonably anticipating that litigation will occur.

The court found that the September 6, 2024 letters gave the defendants notice that litigation was reasonably likely. The defendants therefore had a duty under Rule 37(e) to preserve relevant electronically stored information as of that date. The court ruled that the July deletions did not violate Rule 37(e) because they occurred before that duty arose.

The court found that the September deletions caused the loss of potentially relevant information, including shipping documents, operational files, prompt-engineering files, and information from systems and accounts. Even if Flexport possessed copies of some shipping documents, those copies would not show how the defendants used or altered the files while they possessed them. The court also found that some of the lost information could not practically be restored or replaced and that Flexport suffered at least some prejudice.

Intent and sanctions

Rule 37(e)(2) permits more severe sanctions, including an instruction that the jury may or must presume lost information was unfavorable, when a party acted with the intent to deprive another party of the information’s use in litigation. The court found that Flexport did not prove the required intent. It reasoned that the defendants appeared to be trying to avoid litigation, had preserved other evidence about Freightmate’s development, and could have mistakenly interpreted Flexport’s September letters as requesting deletion. The court therefore denied Flexport’s request for sanctions under Rule 37(e)(2).

Under Rule 37(e)(1), the court ordered a modified California Civil Jury Instruction 204. The jury may consider whether a party intentionally concealed or destroyed evidence with the specific intent to deprive the other party of that evidence for use in the lawsuit. If the jury finds that intent, it may decide that the evidence would have been unfavorable to that party. The court said this instruction was intended to address Flexport’s prejudice without making the jury adopt a required adverse inference. Any disputes about the evidence and arguments permitted at trial were left for the presiding district judge.

Fees and disposition

The court denied Flexport’s request for attorneys’ fees and costs. Flexport had not requested a specific amount or submitted the declarations and detailed expense information required by the Northern District of California’s local rule governing discovery sanctions.

Judge Peter H. Kang granted in part Flexport’s motion for sanctions, ordered the modified jury instruction, and denied Flexport’s request for monetary sanctions. The order did not decide the ultimate merits of Flexport’s trade-secret claims.