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E-Discovery Giants Feud Over Trade Secrets in SDNY

June 2, 2017, 4:42 PM

For a sense of how competitive the fast-growing e-Discovery services sector has become, consider the accusations flying in a federal lawsuit in Manhattan between one vendor and its former top salesmen.

DTI Global, which provides e-Discovery services such as document review, is accusing its rival, LDiscovery, of dangling a total of $24 million in potential bonus payments to entice four of its top salesman to leave and join their company, and to allegedly bring major clients with them.

In its complaint, DTI levels a raft of claims against the four sales employees and LDiscovery, including breach of noncompete agreements, conspiracy and misappropriation of trade secrets. Many of the claims hinge on accusations that in June 2016, Chris Weiler, president and CEO of LDiscovery, began communicating with the salesmen about leaving DTI; and that the four salesmen subsequently downloaded critical information about DTI’s clients, such as their purchase history, their pricing needs and other preferences, which they kept when they all departed on Jan. 17, 2017, according to the complaint.

“Without such information, [they] would not have known such customers’ needs,” Charles Leuin, of Greenberg Traurig, who represents DTI, wrote in the complaint.

View the case docket on Bloomberg Law here .

The case was originally filed in early April as three separate lawsuits in Illinois, New York and Virginia — locations where the various salesman were based — but the cases were subsequently consolidated in front of U.S. District Judge Jed Rakoff in Manhattan.

This week, Rakoff listened to DTI’s arguments for a preliminary injunction to prevent the salesman from continuing to use its confidential information, while the defendants have moved to compel arbitration on the claims. Both companies declined to comment, and attorneys for the individual defendants were not available for comment.

LDiscovery and the defendants have denied any wrongdoing. In a brief, lawyers for LDiscovery wrote that Weiler approached the salesman through a headhunter, honored the one-year noncompete agreements in the salesman’s contracts and consulted with his outside counsel at Morrison & Foerster, including Eric Tate, co-chair of the firm’s employment and labor practice.

“The undisputed evidence is that LDiscovery received none of Plaintiffs’ documents or trade secrets, and did not ask, encourage, or use Plaintiffs’ former employees to solicit any clients,” its attorney, C. Bryan Wilson, of Williams & Connolly wrote in an opposition to the motion for a preliminary injunction.

Both companies are backed by private equity funds, who have been leading a wave of e-Discovery acquisitions in recent years.

DTI’s majority shareholders are OMERS Private Equity and Harvest Partners, LP, who in 2016 acquired another e-discovery services provider, Epiq Systems, in a transaction valued at approximately $1 billion. The salesman allegedly worked at Epiq, which was made into a wholly owned subsidiary of DTI.

Meanwhile, in January 2016, the Carlyle Group and the venture capital firm Revolution Growth paid $150 million to acquire LDiscovery. In October, the company purchased Kroll Ontrack for $410 million, which is where the salesman allegedly were hired. The combined company is rebranding itself as KrolLDiscovery.

The case underscores how fast the global e-Discovery market, which includes both the software used for data processing and review, as well as managed services such as the actual review of documents, is growing: It was estimated at $7.89 billion in 2016, according to Market Reports Hub with a 23.4 percent compound annual growth rate. The managed services component, where both DTI and LDiscovery operate, is described as the fastest growing segment.

Courts are already taking e-Discovery seriously. Last July, a federal judge in Delawareimposed $3 million in “punitive” sanctions against Plantronics, a California-based headset manufacturer, for discovery spoliation violations. Earlier this week, the company filed a 10-k that confirmed the General Services Administration has proposed debarring it from working with federal contractors, which it said may have a material impact on its business.

George Gutierrez, a spokesman for Plantronics, said the company has been in touch with the GSA and submitted documents, in an effort to fend off the proposed the debarment. But until a final decision is made, the company is prohibited from working on any federal contracts, he said.

Meanwhile, one e-Discovery consultant who was familiar with the DTI lawsuit against LDiscovery, but spoke on background because he was not authorized to speak about it, said there’s a lot at stake for LDiscovery, because it is in the business of handling other companies’ data and the accusations are that it stole another company’s confidential data.

The alleged $24 million in potential bonus payments to the individuals — if true — also shows how lucrative client accounts can be, and also the lack of transparency in the services market, he said.

“Most law firms and corporate legal departments are still not sophisticated consumers” of these services, the consultant said.

That’s why knowing how much a client has paid in the past, and other bidding strategies are so valuable, he said.

Gareth Evans, a partner at Gibson Dunn & Crutcher who handles e-Discovery, said that increasingly corporate law departments are taking a closer look at e-Discovery expenditures. But he added that many lawyers are still unfamiliar with going market rates and look first for a vendor that is trustworthy, rather than the best value.

“Sometimes you’ll see attorneys who will say ‘I’ve used this outfit the last time and it’s gone just fine, I’ll do it again,’” said Evans.

Will Darman, who lead Carlyle Group’s purchase of LDiscovery,explained in an interview with Big Law Business at the time of the purchase in 2016 that part of the investment thesis is that the e-Discovery space is dominated by smaller players that have strong business relationships with clients. Thus, larger companies have an incentive to acquire smaller players in a way that preserves the relationships, he said.

His associate at Revolution Growth, Evan Morgan, told Big Law Business at the time that “trust” was important because e-Discovery involves a company handing over sensitive data.

It is not the first time that DTI’s subsidiary, Epiq Systems, has appeared in federal court for a noncompete and trade secrets dispute.

In 2012, one of Epiq’s subsidiaries, Encore Intermediate Holdco, squared off in Arizona federal court with a competitor, Modus, which had hired three of its former employees. Encore claimed the employees and Modus had breached a noncompete agreement and had violated the state’s trade secrets laws. That case settled in 2014 on undisclosed terms, after a judge dismissed many of the claims, according to the docket.

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