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Seneczko Wins Default as Discovery Sanction in Duty of Loyalty Claim

Wessels Sherman Attorney Alan Seneczko, managing shareholder of the Wisconsin office, recently won a huge decision in a claim against a former executive for breach of his duty of loyalty to the company (among other claims). The company, Storage Battery Systems, suspected its director of sales was using his position and the confidential information he acquired during his employment to funnel the company's business opportunities to his own company, in competition with and in violation of his duty of loyalty to the company and his non-compete agreement. See, Storage Battery Systems, LLC v. Glenn Wilder and Professional Power Engineering, LLC, Case No. 17cv1244 (Wis. Cir. Ct., 01/17/19).

During the discovery process Seneczko requested electronic data, including data reflecting the defendants' sales both during and after the termination of the employment relationship. In response, the defendants produced certain documents, but refused to produce any electronic data, which the court then compelled them to do. However, despite being ordered by the court to produce the data, the defendants produced a hard drive that had been wiped clean of data during the critical time period - allegedly the result of an attempt to remedy an unknown virus encountered while attempting to duplicate the hard drive. SBS also demonstrated, based on evidence it was able to recover, that the defendant had manipulated electronic data in order to conceal, delete and/or diminish evidence of revenue, sales and other transactions.

Seneczko moved the court to enter a default judgment in its favor as a sanction for the defendants' willful discovery violations and disregard of the court's orders - the most extreme sanction possible. After considering the parties' arguments and conducting evidentiary hearings on the issue, the court granted the motion and entered judgment in favor of the plaintiff on all counts, finding that the defendants had egregiously, intentionally and flagrantly violated its orders by destroying and modifying electronic information in a conscious attempt to affect the outcome of the litigation. It ordered the defendants to reimburse the plaintiff $89,000 in costs and attorney fees, post a $400,000 surety bond to cover a potential recovery by SBS, and proceed to an evidentiary hearing on the amount of damages SBS had suffered as a result of the wrongful conduct.

Besides being a very nice victory for SBS, the court's decision is important in two respects. First, it demonstrates that an executive's duty of loyalty to the company he/she serves is very real, with serious consequences for any breach of that duty. Second, a party's discovery obligations are also very real, with serious consequences for attempts to delete, obstruct or manipulate evidence that has been requested during the litigation process.

If you have questions about an employee's duty of loyalty to your company, enforcement of a non-compete or no-solicitation agreement, feel free to contact Attorney Alan E. Seneczko at (262) 560-9696, or [email protected].

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