Spoliation in Trade Secrets Case Leads to Default Judgment and ITC Exclusion Order

The ITC is renowned for the speed with which it moves its docket and, while money damages are unavailable in ITC proceedings, trade secret owners are able to obtain exclusion orders barring importation of goods manufactured through the use of the misappropriated trade secrets. ITC proceedings (commonly known as 337 proceedings) have their own rules and procedures which can be very different from federal and state court; however, a February 10, 2021 ruling serves as a stark reminder that no matter the forum, spoliation of evidence can lead to severe sanctions against parties engaged in the destruction of relevant evidence.

The case is In the Matter of Certain Pouch-type Battery Cells, Battery Modules and Battery Packs, Components Thereof and Products Containing the Same, investigation number 337-TA-1179, a dispute between two South Korean rivals. LG Energy alleged it lost $1 billion through SK Innovation’s broad-ranging conspiracy to poach employees and steal trade secrets behind its electric vehicle batteries. LG Energy alleged that, with the stolen information, SK Innovation was able to obtain an unfair advantage in the production of its own electric car battery while at the same time damaging LG Energy’s ability to manufacture and sell its product in the US market.

In February 2020, a single ITC judge found that SK Innovation was required to take steps to preserve evidence after it received a letter on April 9, 2019, in which LG threatened legal action if SK Innovation refused to stop its alleged IP theft. The ITC judge further found that instead of abiding with the duty to preserve evidence, SK Innovation engaged in a companywide effort to destroy documents and other materials relevant to the dispute. Significantly, the judge found that the spoliation was meant to hobble his ability to decide the case and that, as a consequence, a default judgment in favor of LG was the only reasonable remedy. In an unambiguous reminder to non-US companies who find themselves litigating in US forums, the ITC judge rejected SK Innovations’ argument that the ITC should not impose the ultimate spoliation sanction on a Korean company that has not expected it would be subject to US evidence preservation laws.

SK Innovations appealed the February 2020 default ruling to the full ITC, which issued its affirmance last week. In addition to affirming the default judgment granted as a sanction for the spoliation of evidence, the full ITC issued a limited exclusion order prohibiting “the entry of certain lithium-ion batteries, battery cells, battery modules, battery packs and components thereof” for the next decade (the commission said it would still allow SK Innovation to import components for domestic production of the batteries for certain Ford Motor Company and Volkswagen of America vehicles, as well as materials for repairing and replacing batteries for Kia vehicles previously sold to US consumers).

Spoliation of evidence is an issue arising with increasing frequency in trade secret cases, and litigants on both sides of the “v” need to be acutely aware of their duties to preserve relevant evidence – no matter the forum. The duty to preserve evidence arises in federal and state courts, before arbitral tribunals, and as the dispute between LG Energy and SK Innovations now reminds us, in proceedings before the ITC. We have previously published guidance on litigating spoliation claims in trade secrets cases (Litigating Spoliation Claims in Trade Secret Cases | Arent Fox) and will continue to monitor developments in this area.