Hennepin County District Court File No. 27CV0619000
Lewis A. Remele, Jr., Charles E. Lundberg, Mark R. Bradford, Bassford Remele, P.A., and Robert N. Hochman (pro hac vice), Sidley Austin, L.L.P., Chicago, Illinois (for appellant)
Clifford M. Greene, Larry D. Espel, Greene Espel, P.L.L.P., and Lisa S. Blatt (pro hac vice), Arnold & Porter, L.L.P., Washington, D.C.; and Michael D. Schissel, New York, New York (for respondents Western Digital, et al.)
George W. Soule, Nathan J. Marcusen, Bowman and Brooke, L.L.P., (for respondent Sining Mao)
Considered and decided by Hudson, Presiding Judge; Peterson, Judge; and Stauber, Judge.
1. A party to arbitration waives its right to object to an arbitrator's authority to impose sanctions when that party (a) fails to raise the issue before the arbitrator and (b) seeks the imposition of sanctions against the other party to the arbitration.
2. An arbitrator does not exceed his authority by imposing sanctions for bad-faith litigation conduct when both the arbitration agreement and the applicable arbitration rules, although silent on the issue of sanctions, provide the arbitrator with broad authority to grant relief.
3. The district court abuses its discretion by ordering a rehearing before a new arbitrator without making findings that the award was procured by fraud or corruption, or that the arbitrator exhibited partiality, or that some other basis supports beginning the arbitration anew.
In this discretionary appeal, appellant challenges a district court order vacating in part a trade-secrets arbitration award and ordering a rehearing before a new arbitrator. Appellant argues that the district court erred by (1) determining that the arbitrator exceeded his authority by precluding respondents from defending particular claims as a sanction for respondents' fabrication of evidence and that respondents had not waived an objection to the arbitrator's authority in that regard; (2) reviewing the merits of the arbitrator's decision to impose sanctions; (3) granting vacatur based on public policy; and (4) ordering a rehearing before a new arbitrator. Because we conclude that respondents waived any objection to the arbitrator's authority, that the arbitrator had authority to impose the challenged sanction, and that the award does not violate public policy, we revese and remand for entry of an order and judgment confirming the award.
Appellant Seagate Technology LLC, a hard-drive manufacturer, employed respondent Sining Mao until October 2006, when Mao left to accept a position with Seagate's competitor, respondent Western Digital Corporation. Mao's employment agreement with Seagate included the following arbitration clause:
Arbitration: Except as stated below, I agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Hennepin County, Minnesota, in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. The Company and I shall each pay one-half of the costs and expenses of such arbitration, and each of us shall separately pay our counsel fees and expenses.
After Mao joined Western Digital, Seagate commenced an action in district court seeking injunctive relief to prevent Mao's disclosure of Seagate's trade secrets. The employment agreement was disclosed during discovery; respondents moved to compel arbitration; and the district court granted the motion. Judge Robert Schumacher, a retired member of this court who had previously been appointed by the district court as a special master for discovery, was selected as the arbitrator.
Before the arbitration hearing took place, Seagate brought motions for sanctions based on respondents' alleged spoliation and fabrication of evidence. At Western Digital's urging, the arbitrator deferred consideration of the motions until after the arbitration hearing.
After four years of prehearing preparation and discovery amassing 14, 000 pages of information, the arbitration hearing was held over 34 days. The parties tried trade-secrets claims against Mao and Western Digital; claims against Mao for breaches of contract and fiduciary duty; and a claim against Western Digital for tortious interference with contractual relations. The arbitrator issued a 27-page decision, addressing the merits of both the sanctions motions and the claims.
The arbitrator found insufficient evidence of spoliation but found that Mao had fabricated documents intended to prove that three of the trade secrets—referenced as Trade Secrets 4-6—had been publicly disclosed before Mao left Seagate. The fabrication involved Mao's addition of two PowerPoint slides to his copy of a presentation that he had given while still employed by Seagate. These two slides were not present in other copies of the presentation that were obtained during discovery. The arbitrator found that the additional slides were identical to other slides that Mao had created after becoming employed at Western Digital and that, if they had been prepared while Mao was at Seagate—as he claimed—they would not have had the Western Digital format. The arbitrator found that "Dr. Mao fabricated the . . . presentations . . . while he was working at Western Digital for the purposes of this litigation." The arbitrator further found that "[t]he fabrications were obvious" and that there "is no question that Western Digital had to know of the fabrications."
In determining an appropriate sanction, the arbitrator stated that:
Dr. Mao's fabrication of evidence and Western Digital's complicity by submitting the obviously fabricated evidence to the Arbitrator is an egregious form of litigation misconduct and warrants severe sanctions. See Harris Trust & Savings Bank v. Ali, 425 N.E.2d 1359, 1366 (Ill.App. 1981) ("When evidence is shown to have been fabricated, a presumption arises that the cause of action or the defense it was intended to support is without substantial foundation.") (quoting 2 Callaghan's Illinois Evidence § 3.152 (1964))).
The arbitrator imposed a sanction in the form of precluding "any evidence or defense by Western Digital and Dr. Mao disputing the validity" or use of Trade Secrets 4-6 and "[e]ntry of judgment against Western Digital and Dr. Mao of liability for misappropriation and use of" Trade Secrets 4-6.
Consistent with the sanction ordered, the arbitrator found in favor of Seagate on its trade-secrets claims arising out of Trade Secrets 4-6 and also found that Mao had breached his employment contract. The arbitrator awarded damages totaling $525 million and awarded prejudgment interest ...