eDiscovery Is Big Business -- And Worth Fighting Over For Providers
Two major players in the ediscovery space duke it out in federal court.
The latest statistics put the value of the ediscovery market at just over $9 billion for 2017, with an increase to over $16 billion by 2021. That’s a lot of greenbacks, and a lot of motivation for folks who see a booming industry with money to be made. It’s a market rife with big fish working to swallow up little fish and fights to the death on pricing for clients. And we have a doozy of a fight going on right now in federal court.
Back in the early 2000s, George Socha and Tom Gelbmann used to conduct annual counts of the number of ediscovery providers in the space as part of their Electronic Discovery Survey. That number hovered around 600 to 700 providers, all at varying levels of knowledge and expertise in the ediscovery world, but all of them looking for their piece of the pie. We’ve seen tremendous consolidation in the market over the last few years, and two of the biggest mergers happened when DTI (Document Technologies, Inc.) bought Epiq Systems in September 2016, and when LDiscovery acquired Kroll a few months later, in December 2016. With those acquisitions, DTI and the new KrolLDiscovery became two of the biggest players in the ediscovery provider space.
Now, just a few months later, DTI and LDiscovery (d/b/a Kroll Discovery) have come to blows in federal court. Court filings in three separate lawsuits allege that while the owners of DTI were busy finalizing their acquisition of Epiq, four of DTI’s top salespeople were busy conspiring with LDiscovery to steal trade secrets and millions of dollars in business from DTI when they resigned collectively on January 5, 2017, with no notice to DTI.
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The lawsuits filed in New York, Illinois and Virginia by DTI allege a conspiracy between LDiscovery, Steve West, John Parker, Mark Hosford and Seth Kreger (DTI’s former sales reps) to “misappropriate DTI’s confidential, proprietary, and trade secret information, and then utilize such information to interfere with DTI’s business relationships.” One of the complaints, filed against LDiscovery originally in the Eastern District of Virginia, alleges that LDiscovery:
enticed defendants to abandon their contractual obligations to DTI and breach all fiduciary duties and duties of loyalty owed thereto with the promise of nearly $24 million in guaranteed payments in exchange for using the goodwill and customer relationships garnered during their employment with DTI for the benefit of LDiscovery.
Let’s pause for a moment and let that number sink in — $24 million. For four salespeople. Are you pulling in $6 million?
DTI filed two additional suits in New York and Illinois against the four salespeople individually, with claims that the individuals used DTI laptops and company-issued mobile phones to communicate directly with the president of LDiscovery to gather and provide DTI’s trade secret information. According to the complaint in the Virginia action, at least one of the defendants communicated with Chris Weiler, president of LDiscovery, on “more than thirty separate occasions between June 2016 and January 2017,” and that all four former sales reps were near LDiscovery’s headquarters in Virginia in the same two-day period. (The full complaint in the New York case is posted on the next page.)
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The complaint also alleges that one of the former employees received and reviewed a proposed term sheet between the employees and LDiscovery. The proposed term sheet — which one of the sales reps allegedly received and reviewed on his DTI-issued laptop (remind me again what these guys did for a living?) — provided that the reps would receive signing bonuses, guaranteed payments, sales commissions, and all of their COBRA premiums paid upon their resignation from DTI. And then they all resigned on the same day.
Huh.
All three cases will now be pending (and likely consolidated) in the United States District Court for the Southern District of New York, with Judge Jed Rakoff presiding. The Virginia and Illinois matters were transferred to the court on May 9-10, 2017.
The case will also have some interesting ediscovery issues. In Judge Rakoff’s ruling denying LDiscovery’s motion to transfer the New York case to Virginia, he noted that defendants are alleged to have
used their company-issued electronic devices to conspire with a direct competitor to misappropriate their employers’ trade secrets, and subsequently accessed their employers’ New York-based web servers using their company-issued laptops and credentials to download their employers’ proprietary information and transfer it out of state. One of the defendants then wiped his laptop prior to returning it to his New York employer in order to “cover” his tracks, while another declined to return his company-issued cell phone claiming that it had been “lost.”
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In addition, those laptops and mobile devices, at least the ones that still exist, will be key evidence of the communications between the parties. I wonder if any of the former employees remembered to turn off the GPS on their phones before allegedly visiting LDiscovery headquarters.
Judge Rakoff has also scheduled a hearing on May 30, 2017, for DTI’s motion for a preliminary injunction. DTI seeks a permanent injunction, lost profits, and treble damages and attorneys’ fees. A motion to move the matter to arbitration is also pending.
LDiscovery and DTI both declined to comment on the litigation.
Stay tuned.
(Flip to the next page to read the complaint in the S.D.N.Y. action.)
Kelly Twigger gave up the golden handcuffs of her Biglaw partnership to start ESI Attorneys, an eDiscovery and information law Firm, in 2009. She is passionate about teaching lawyers and legal professionals how to think about and use ESI to win, and does so regularly for her clients. The Wisconsin State Bar named Kelly a Legal Innovator in 2014 for her development of eDiscovery Assistant — an online eDiscovery playbook for lawyers and legal professionals. When she’s not thinking, writing or talking about ESI, Kelly is wandering in the mountains of Colorado, or watching Kentucky basketball. You can reach her by email at [email protected] or on Twitter: @kellytwigger.
