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Judge Rakoff Shoots Down eDiscovery Trade Secrets Case

July 7, 2017, 8:05 PM

In the booming world of e-discovery services, having a sales team with strong client relationships can mean everything.

Or at least for LDiscovery, it was worth about $24 million — which is the sum in bonuses and other potential payments it offered to entice four sales agents, who defected from competitor DTI Global, which subsequently filed a lawsuit seeking an injunction to prevent the hires.

Earlier this week, a federal judge in Manhattan rejected DTI’s arguments that the sales team had misappropriated key trade secrets, such as its e-discovery clients’ purchasing needs, and denied its motion for a preliminary injunction.

“Business apparentlyisbooming-and sotoo are providers’ effortsto protectwhatthey believeis theirproprietary information regarding customer contracts,strategies,andthelike,” U.S. District Judge Jed Rakoff wrote in a 30-page opinion that found DTI was unlikely to succeed on any of its claims.

Rakoff added later in the opinion, “The Court, however, is unpersuaded that LDiscovery has done anything improper by entering into these agreements with the Individual Defendants, let alone that the Individual Defendants have breached the applicable terms of their agreements with DTI.”

In April, DTI filed its lawsuit against the four salesman and LDiscovery, claiming they misappropriated trade secrets, interfered with client relationships and breached their contracts. A key claim is that the sales team improperly took customer lists from DTI, including information about those customers’ discovery needs.

In court documents filed in the case, the sales team argued they departed because they regarded DTI as a “low-cost” provider, which would harm their reputation with clients, and they wanted to work for a company with document review centers in Washington, D.C. and Canada.

The judge held a three-day evidentiary hearing on the preliminary injunction motion in June. Last week, he dismissed the claims against LDiscovery and granted the individual defendants’ motion to move the case to a private arbitration.

View the case docket on Bloomberg Law here .

Both DTI and LDiscovery have been touched by the wave of private equity investment sweeping the managed services part of the discovery industry, which includes all the companies that conduct document review for litigation or part of the due diligence portions of transactions. DTI’s majority shareholders are OMERS Private Equity and Harvest Partners, LP, while LDiscovery was purchased by the Carlyle Group and the venture capital firm Revolution Growth.

Rakoff wrote that the discovery industry has experienced drastic transformations in recent years: “Thepainstaking process of gatheringandreviewingdocumentsin connection withlitigationdiscovery used tobeatask relegated to(anddreadedby) youngassociatesandparalegalsatournation’slawfirms.Withthe advent ofelectronicdiscovery,however,firmshaveshifted thistask tothird-partyproviders,whoin turnhavedeveloped cleverstrategiesforcultivatingcustomers,whichthey guard jealously.”

But the judge refused to look askance on the collective $5.1 million in total bonus payments that LDiscovery agreed to pay to the four high level sales agents during a “sabbatical year” they took off after leaving DTI and before starting in their new jobs. Nor did he look unfavorably on the fact that LDiscovery indemnified the sales agents against any litigation, such as the current lawsuit.

As for sharing information about the revenue that DTI’s clients’ generated, Rakoff wrote that this information is not “protectable.”

“TheCourt,however,isunpersuadedthatLDiscoveryhasdoneanything improperbyentering into these agreements with the Individual Defendants,” the judge wrote.

Through a spokeswoman, DTI said it intends to pursue its claims against the individuals in arbitration and has filed a motion asking the judge to reconsider his dismissal of the claims against LDiscovery.

DTI also released a statement, which read in part: “We are extremely disappointed in the Court’s opinion as we believe it fails to take into account certain evidence that was presented during the three-day hearing. Specifically, we believe the Court’s opinion overlooks evidence regarding the individual defendants’ misappropriation of DTI’s confidential, proprietary and trade secret information, their solicitation of other employees, and LDiscovery’s role in their misconduct.”

Charles Leuin, of Greenberg Traurig represents DTI and was not available for comment.

LDiscovery, LLC is represented by Joseph G. Petrosinelli, Kenneth J. Brown, and C. Bryan Wilson of Williams & Connolly LLP and declined to comment.