Source Production & Equip. Co. v. Schehr
Source Production & Equip. Co. v. Schehr
2019 WL 9904281 (E.D. La. 2019)
April 11, 2019

van Meerveld, Janis,  United States Magistrate Judge

Failure to Produce
Forensic Examination
Proportionality
Protective Order
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Summary
The Plaintiffs requested the production of a group of drawings related to the Aspect 12K Container, which they allege contain trade secrets. The Court found that the Plaintiffs are entitled to the Container Drawings to complete their analysis, and ordered the Defendants to produce them within 48 hours, subject to the Attorneys' Eyes Only designation of the Protective Order. This case highlights the importance of ESI in trade secret misappropriation cases.
SOURCE PRODUCTION & EQUIPMENT CO., INC., ET AL.
v.
KEVIN J. SCHEHR, ET AL.
CIVIL ACTION NO. 16-17528
United States District Court, E.D. Louisiana
Filed April 11, 2019

Counsel

Henry M. Perlowski, Pro Hac Vice, Arnall, Golden & Gregory, Atlanta, GA, for Unidentified Parties
van Meerveld, Janis, United States Magistrate Judge

ORDER AND REASONS

*1 Before the Court is the Motion to Compel (Rec. Doc. 175) filed by plaintiffs Source Production & Equipment Co., Inc. (“SPEC”), Aspect Technology Limited (“Aspect”), SpecMed, LLC (“SpecMed”), SPEC MED Intellectual Property, LLC (“SPEC MED IP”), and SPEC Intellectual Property, LLC (“SPEC IP,” with Aspect, SpecMed, and SPEC MED IP the “SPEC Affiliates” and Spec Affiliates with SPEC, the “Plaintiffs”). For the reasons discussed reasons below, the Court finds the documents Plaintiffs seek are relevant and important to the case and the burden of production is minimal. Accordingly, the Motion to Compel is GRANTED in part; defendants shall produce the drawings to the Plaintiffs within 48 hours subject to the Attorneys’ Eyes Only designation of the Protective Order. Any appeal of this ruling to the District Court shall be filed within 48 hours. An appeal does not automatically stay production. As to the remaining issue of whether the documents can be disclosed to Plaintiffs’ expert Troy Hedger, who the defendants allege is a competitor, the Motion to Compel is set for oral argument on Wednesday, April 17, 2019, at 11:00 a.m., before Magistrate Judge Janis van Meerveld, Courtroom B-309, Hale Boggs Building, 500 Poydras Street, New Orleans, Louisiana 70130. Until the Court rules on this issue, Plaintiffs shall not disclose the drawings that are the subject of this Motion to anyone other than those identified in paragraphs B(1)(a), (c), (d), and (g) of the Protective Order.
 
Background
This is a trade-secret misappropriation and unfair competition lawsuit against a former employee and his new employer, with counterclaims for defamation, invasion of privacy, revendicatory relief, breach of contract, unpaid wages, and intentional interference with a contract. Plaintiff SPEC was founded by Richard Dicharry, who has served as SPEC's president. The SPEC Affiliates were formed to develop medical uses for SPEC's products and technologies, and they are managed under common control. SPEC says it is a leading supplier of industrial gamma radiography equipment, industrial medical radioactive gamma radiography equipment, and radioactive isotype materials. SPEC obtains raw radioactive source materials from nuclear reactors located in foreign nations in special containers designed to prevent the emission of radiation. In a shielded radiation containment chamber, SPEC fabricates the raw radioactive sources according to customer specifications. SPEC's business is highly regulated and very competitive. SPEC says it has only two competitors in the United States and only a handful of competitors abroad.
 
Defendant Kevin J. Schehr was Vice President, General Manager, and Secretary/Director of SPEC and the highest-ranking day-to-day executive of SPEC's Affiliates. According to the Plaintiffs, following two failed attempts to obtain an ownership interest in SPEC in 2012 and 2014, Schehr became resentful. Plaintiffs allege that Schehr made several misrepresentations to Dicharry that he knew to be false, caused SPEC to default on the terms of a sales agreement, negotiated business contracts against Dicharry's wishes, filed for and claimed ownership rights to patents developed using SPEC's resources, and provided false financial information in order to inflate his personal bonuses, among several other alleged transgressions.
 
*2 SPEC terminated Schehr's employment on July 10, 2016. Plaintiffs allege that after his termination, Schehr did not immediately return his company-issued laptop, despite SPEC's demand that he do so. Plaintiffs further allege that once the laptop was returned, a forensic analysis revealed that Schehr emailed a number of SPEC's confidential and proprietary files to his personal email accounts. According to Plaintiffs, the analysis also showed that minutes after his termination, Schehr attached two external hard drives to the laptop and subsequently deleted 5,086 files from the laptop. Plaintiffs allege that Schehr continues to possess other storage media belonging to SPEC, including thumb drives and CDs.
 
Further, Plaintiffs allege that both during and after his employment with SPEC, Schehr conspired with Isoflex USA (“Isoflex”) and Isoflex's principal executive Richard H. McKanny, Jr., to form ISOFLEX Radioactive, LLC (“IsoRad”). Plaintiffs allege that in doing so, Schehr misappropriated SPEC's trade secrets and confidential information to allow IsoRad to compete with SPEC. Plaintiffs have named Isolflex, McKanny, IsoRad, and Schehr as defendants.
 
In his counterclaim, Schehr alleges that Dicharry had promised to give him a 10% ownership interest in SPEC if Schehr facilitated the completion of the design of a new radiography system. Schehr says that the design was completed, but that two weeks before Schehr's termination, Dicharry unreasonably refused to sign off on the new design. Schehr alleges that upon his termination, SPEC seized a thumb drive and pictures belonging to him and accessed Schehr's personal email with a password on the thumb drive. Schehr alleges that Sandra Kusy (the individual who replaced him three days before his termination) and Dicharry made defamatory statements about him after his termination.
 
Isoflex also asserts a counterclaim against SPEC, alleging that SPEC owes Isoflex $614,597.52 on open account. It also claims that as a result of SPEC's failure to pay, Isoflex was forced to pay a settlement sum of $99,322.50 to Production Association Mayak (“PAM”) and it has lost its relationship with PAM.
 
Discovery Issue
The present motion to compel concerns documents that Plaintiffs say are relevant to their trade secret misappropriation claims. Specifically, Plaintiffs allege that “several critical features” of their Aspect 12K Transport Containers (made up of the Aspect 12K Transport Package, the Minibulk Inner Container, the Maxibulk Inner Container, and the 10 Channel Inner Container) are not publicly available and/or known to competitors and constitute trade secrets. (Rec. Doc. 33, at 11). As examples of these trade secrets, Plaintiffs’ complaint cites the specialized insulation material and the process for mixing and producing it, the dimensional tolerances for the components of the Aspect 12K Containers, and the shielded metal arc welding (SMAW) and gas tungsten arc welding (GTAW) techniques and processes used in the manufacture of Aspect 12K Containers. During the course of discovery, the undersigned ordered Plaintiffs to identify their allegedly misappropriated trade secrets with particularity. At that time, the Plaintiffs included the examples above, but did not include any other examples of trade secrets related to the Aspect 12K Containers that were allegedly misappropriated.
 
Early in discovery, Plaintiffs issued an interrogatory asking IsoRad to describe its business operations, including an explanation of whether it was “producing or plans to produce radioactive source transport containers.” On April 9, 2018, Isorad responded that it is not producing and has no plans to produce radioactive source transport containers. In July or August 2018, Isorad began designing a radioactive source transport container. On January 9, 2019, it supplemented its interrogatory response to report that it had begun the design process for a transport container. At the same time, Isorad produced six pages of drawings, showing the general design of the IsoRad transport container. On January 18, 2019, Plaintiffs followed up with supplemental discovery requests, including a request that IsoRad produce “All documents reflecting Isoflex Radioactive's efforts to engage in the ‘design, test, [and] manufacturing of bulk transport containers’ at any time on or after July 27, 2016.” IsoRad responded that it had no responsive documents concerning testing and manufacturing and referred Plaintiffs to the documents previously produced by the defendants. Plaintiffs also requested “All documents reflecting Isoflex Radioactive's activities in the ‘design process for a transport container’ during the period between July 27, 2016, and the present.” Reserving its objections pending the identification of trade secrets ordered by the court, IsoRad referred to previously produced documents and stated that “there are no other documents responsive” to the document request.
 
*3 During the deposition of Schehr, Plaintiffs say they learned for the first time that additional, more detailed design drawings of IsoRad's radioactive source transport containers exist.[1] It is these drawings, which they refer to as the “Container Drawings,” that Plaintiffs now seek.
 
Parties’ Arguments
Plaintiffs insist the Container Drawings are relevant to their trade secret misappropriation claims because the drawings will allow Plaintiffs to assess the extent to which defendants copied proprietary, non-public details of Plaintiffs’ Aspect 12K Container. Plaintiffs also insist the Container Drawings are relevant to rebut the conclusions of defendants’ expert, Cathleen Roughan, who opined that the IsoRad container is not based on the Aspect 12K Container, that the IsoRad container is only in the design stage, and that its drawings will need substantial engineering work before they are sufficient to manufacture and test. Plaintiffs point out that Roughan has not seen the Container Drawings, which they say casts significant doubt on the validity of her conclusions. Plaintiffs add that they seek only to show the Container Drawings to their rebuttal expert Troy Hedger, who will assist them in analyzing the shared characteristics of the Aspect 12K Container and the IsoRad container. Counsel does not intend to disclose the Container Drawings to the Plaintiffs themselves.
 
Defendants oppose production of the Container Drawings. They insist that Plaintiffs’ attempt to obtain the Container Drawings is a last-ditch effort to save their trade secret misappropriation claims from dismissal. Defendants have filed motions for summary judgment on these claims arguing that Plaintiffs have failed to identify any misappropriated trade secrets and that Plaintiffs have no evidence that Defendants have engaged in misappropriation.[2] Defendants argue that the Container Drawings are not relevant. They point out that the three Aspect 12K Container related trade secrets that have been identified by the Plaintiffs concern the insulation, the dimensional tolerances, and the welding techniques. Defendants submit that IsoRad's container uses different insulation material, has different dimensions and different dimensional tolerances, and uses different welds. They seem to argue that Plaintiffs’ trade secret claims relative to the Aspect 12K Containers are limited to the three characteristics identified by the Plaintiffs in their complaint and more recently in response to the undersigned's order. They argue that the Container Drawings have no relevance to these three alleged trade secrets. Further, Defendants argue that the Container Drawings are not necessary for Plaintiffs to rebut Roughan's conclusions. They point out that Plaintiffs already claim to have evidence that casts significant doubt on her report. Additionally, they say the Container Drawings do not call into question Roughan's conclusion that the IsoRad container is only in the design stage because the draft production drawings are simply drawings. They do not address whether the Container Drawings could rebut the conclusion that the containers are similar. Although the issue of the admissibility of the Hedger rebuttal report is not before the undersigned, Defendants also argue that Plaintiffs should not be allowed to offer an untimely rebuttal expert report because they failed to present an initial expert report by their deadline to do so. Finally, Defendants argue that Plaintiffs’ proposal to show the Container Drawings to Hedger is unacceptable because Hedger is a representative of Alpha-Omega Services, Inc., (“AOS”) a competitor of the Defendants (and, according to the Defendants, also a competitor of the Plaintiffs). Pursuant to the protective order entered in this case, confidential documents may not be shared with competitors of a party to this litigation.
 
*4 On the issue of whether Hedger is a competitor, the parties have submitted competing affidavits of Hedger on the one hand, who asserts that AOS is not a competitor of the Defendants and the affidavit of Schehr on the other hand, who asserts that AOS is a competitor. As noted above, the Court will conduct oral argument on this issue before ruling whether the Container Drawings may be disclosed to Mr. Hedger.
 
Law and Analysis
1. Scope of Discovery
The Federal Rules of Civil Procedure provide that “parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case.” Fed. R. Civ. Proc. 26(b)(1). Of note, with the 2015 amendment to Rule 26, it is now clear that “[i]nformation within this scope of discovery need not be admissible in evidence to be discoverable.” Id. In assessing proportionality of discovery, the following should be considered: “the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Id. The advisory committee comments to the 2015 amendment to Rule 26 make clear that the parties and the court have a collective responsibility to ensure that discovery is proportional. The party claiming it would suffer an undue burden or expense is typically in the best position to explain why, while the party claiming the information sought is important to resolve the issues in the case should be able “to explain the ways in which the underlying information bears on the issues as that party understands them.” Id. advisory committee's note to 2015 amendment. “The court's responsibility, using all the information provided by the parties, is to consider these and all the other factors in reaching a case-specific determination of the appropriate scope of discovery.” Id.
 
2. Discovery in Trade Secret Cases
In some trade secret misappropriation cases, the plaintiff is required to identify the alleged trade secrets at issue, prior to discovery. E.g., Kalencom Corp. v. Shulman, No. CV 17-5453, 2018 WL 1806037, at *5 (E.D. La. Apr. 17, 2018); StoneEagle Servs., Inc. v. Valentine, No. 3:12-CV-1687-P, 2013 WL 9554563, at *2 (N.D. Tex. June 5, 2013). The purpose of this procedure is to prevent the use of lawsuits as a fishing expedition to discover the trade secrets of a competitor, to more clearly determine whether the discovery sought is relevant, to allow the defendant to mount a defense, and to ensure that the party seeking discovery does not mold its cause of action around the discovery it receives. Kalencom, 2018 WL 1806037, at *3 (quoting DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676, 680 (N.D. Ga. 2007)). On the other hand, though, policies favoring discovery prior to the identification of trade secrets include the concern that if a company “has hundreds or thousands of trade secrets, [it] may have no way of knowing what trade secrets have been misappropriated until it receives discovery on how the defendant is operating.” Id. (quoting DuRebeis, 244 F.R.D. at 680). Additionally, if required to identify trade secrets first, the plaintiff can be put in the difficult situation of making a list that is so general that it includes items that are not trade secrets, or a list that is so specific, it may miss what defendant is actually using. Id.
 
3. Discoverability of the Container Drawings
*5 In this case, when faced with voluminous electronic discovery requests served by the Plaintiffs, the undersigned ordered them to identify the allegedly misappropriated trade secrets with particularity. The Defendants seem to rely on this to limit the scope of all discovery. As the Plaintiffs argue in reply, the present issue is unlike the Kalencom case where the court ordered the plaintiff to identify the allegedly misappropriated trade secrets before being allowed any discovery. There, voluminous document requests were at issue. Here, Plaintiffs seek an identifiable group of drawings that appears to be less than 100 pages. In Kalencom, the plaintiff could not show that the defendant was bound to maintain any of plaintiff's information confidential. Here plaintiffs allege all their employees including Schehr were required to execute non-disclosure and confidentiality agreements. (Rec. Doc. 33, at 48-49).
 
Thus, while some discovery in this case may be limited to the trade secrets specifically identified by the Plaintiffs, the particular discovery sought by Plaintiffs now will not be so limited. Plaintiffs have long contended that the non-public characteristics of their Aspect 12K Containers are trade secrets. Without the discovery they now seek, it is not surprising that they have been unable to identify each such trade secret that they believe has been misappropriated. Importantly, Defendants have produced some of the drawings for their containers, indicating their understanding that the Plaintiffs contend their trade secrets with regard to the Aspect 12K Container have been misappropriated. Without the remaining documents, Plaintiffs reasonably insist that they cannot fully analyze whether IsoRad's container is based upon the secret characteristics of the Aspect 12K Container. It may ultimately be shown that these additional drawings do not offer further clarity on that issue, or it may be shown that the drawings support IsoRad's contention that its containers are not based on any of the secret characteristics of the Aspect 12K Container.[3] Nonetheless, the court finds that the Plaintiffs are entitled to the Container Drawings to complete their analysis, including to attempt to rebut the conclusions of the Roughan report. Again, while defendants may ultimately be correct that the Container Drawings will not cast doubt on Roughan's conclusions, that does not preclude the Plaintiffs from analyzing them and making any available argument using them. Not only does the court find the Container Drawings relevant and important to Plaintiffs’ trade secret misappropriation claims, the court finds no burden involved in producing them. Accordingly, the Container Drawings must be produced designated as “Attorneys’ Eyes Only” pursuant to the protective order. Defendants shall do so within 48 hours of this Order and Reasons.
 
4. Confidentiality Concerns
This leaves the issue of whether Hedger is a representative of a competitor of the Defendants. If so, this will preclude the Plaintiffs from showing the Container Drawings to him. The court will address this remaining issue following oral argument.
 
Conclusion
For the foregoing reasons, the Motion to Compel (Rec. Doc. 175) is GRANTED in part; defendants shall produce the Container Drawings to the Plaintiffs within 48 hours subject to the Attorneys’ Eyes Only designation of the Protective Order. Any appeal of this ruling to the District Court shall be filed within 48 hours. An appeal does not automatically stay production. As to the remaining issue of whether the Container Drawings can be disclosed to Mr. Hedger, the Motion to Compel is set for oral argument on Wednesday, April 17, 2019, at 11:00 a.m., before Magistrate Judge Janis van Meerveld, Courtroom B-309, Hale Boggs Building, 500 Poydras Street, New Orleans, Louisiana 70130. Until the Court rules on this issue, Plaintiffs shall not disclose the Container Drawings that are the subject of this Motion to anyone other than those identified in paragraphs B(1)(a), (c), (d), and (g) of the Protective Order.
 
*6 New Orleans, Louisiana, this 11th day of April, 2019.
 
Footnotes
There is a dispute between the parties as to whether Plaintiffs should have known additional documents existed because the undisclosed documents are referenced in a table on the produced documents. The court finds that whether Plaintiffs should have known that there were additional drawings in January when they received the six drawings, or whether they reasonably relied on IsoRad's February 18 discovery responses indicating that all responsive documents had been produced does not bear on the issue now before the Court as Plaintiffs have been sufficiently timely in raising the issue under the circumstances.
One of the arguments raised by Plaintiffs in opposition to the motions for summary judgment is that Plaintiffs and the Court “are unable to evaluate fully Plaintiffs’ trade secret misappropriation claims” without the Container Drawings. (Rec. Doc. 186, at 4-5). Plaintiffs requested a continuance of the motions for summary judgment to conduct discovery into the drawings. Id. at 18-19.
And of course, even if similarities are discovered, Plaintiffs will still have to prove that the corresponding characteristic of the Aspect 12K container is a trade secret.