N. Am. Sci. Assocs. v. Conforti

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North American Science Associates, LLC, an Ohio limited liability company also known as NAMSA, and NAMSA Holdco, LLC, a Delaware limited liability company, Plaintiffs, v. Michael Conforti, Pamela Conforti, and Phoenix Preclinical Labs, LLC, a Minnesota limited liability company, Defendants.

No. 24-cv-287 (JWB/ECW)

United States District Court, D. Minnesota

November 27, 2024

ORDER

ELIZABETH COWAN WRIGHT United States Magistrate Judge

This case is before the Court on Plaintiffs North American Science Associates, LLC and NAMSA Holdco, LLC's (collectively “NAMSA entities”) Motion for Sanctions Against Defendants Michael Conforti and Pamela Conforti for Evidence Spoliation (Dkt. 151). The Court heard oral argument on the Motion on June 28, 2024 (Dkt. 319), and the matter is now ready for decision.^[1]

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Michael and Pamela Conforti and American Preclinical Services

Defendants Michael Conforti (“Michael”) and Pamela Conforti (“Pamela”)^[2] married in 1993. (Dkt. 242 ¶ 2.) Michael earned his Bachelor's and Master's degrees in Biology from the University of Illinois Urbana-Champaign in 1991 and 1993, respectively; his Doctorate in Veterinary Medicine from the University of Wisconsin-Madison in 1997; and his Master's in Business Administration in 2003. (Dkt. 242 ¶ 2.) Pamela earned a Bachelor of Science in Accounting from the University of Illinois Urbana-Champaign and a Master of Science in Business Education from the University of Wisconsin-Whitewater. (Dkt. 250 ¶ 2.) She earned her CPA license from the State of Wisconsin. (Dkt. 250 ¶ 2.) Pamela worked for over 12 years, beginning while earning her Master's degree, as a public accountant, financial analyst, and consultant, until she began working at American Preclinical Services (“APS”) in August 2005. (Dkt. 250 ¶¶ 3, 8.)

Michael started APS in 2005. (Dkt. 242 ¶ 3.) APS was a preclinical medical technology contract research organization (“CRO”) that performed testing of medical devices, pharmaceuticals, and other various biotechnology using animal and cell-based models. (Dkt. 242 ¶ 4.) Michael was the sole owner of APS and served as its President from 2005 to 2021, when North American Science Associates, LLC (“NAMSA”) acquired APS. (Dkt. 242 ¶¶ 3, 7.) Pamela served as APS's Chief Financial Officer and Chief Information Officer from 2005 to 2021, and as its Human Resources from 2005 to 2011. (Dkt. 250 ¶ 8.) Michael and Pamela operated APS together, having started the business “from scratch,” and grew the business to over 300 employees. (Dkt. 242 ¶¶ 3, 5, 6.)

B. NAMSA's Acquisition of APS

In February 2021, NAMSA purchased APS for approximately $44 million. (Dkt. 242 ¶ 7; Dkt. 245 at 17:18-19.)^[3] Michael and Pamela signed Employment Agreements, on or about February 15, 2021, with their employment conditioned on their execution of Confidentiality Agreements with respect to “confidential and proprietary” information belonging to NAMSA, where their confidentiality obligations continued after their employment ended. (Dkt. 180 ¶ 7; Dkt. 180-5 at 3-4; Dkt. 180-6 at 3-4.)^[4] Michael and Pamela also agreed not to compete with NAMSA for certain periods of time. (Dkt. 180 ¶¶ 7-8; Dkt. 180-5 at 8; Dkt. 180-6 at 8; Dkt. 181-3; Dkt. 217 ¶ 2.) Michael also signed a Restricted Covenant Agreement (“RCA”) in connection with NAMSA's purchase of APS. (Dkt. 180 ¶ 8.) Michael stayed on after the sale as the Vice President of ISR Laboratory Operations. (Dkt. 242 ¶ 8.) However, NAMSA removed him from executive leadership within three months after the purchase and, within the first eight months after the sale, Michael became an “individual contributor” without any managerial responsibilities. (Dkt. 242 ¶ 8.) Pamela stayed on as the Director of Finance after the purchase. (Dkt. 97 ¶ 26; see Dkt. 180-4 at 2.)

C. NAMSA Terminates Pamela's Employment and Pamela Copies Certain NAMSA Files

On May 18, 2022, NAMSA told Pamela that it was terminating her employment, where her last day of employment would be May 31, 2022. (Dkt. 39 ¶ 5; Dkt. 242 ¶ 9.) Pamela planned to use her paid time off until May 31, 2022, and consequently NAMSA and Pamela agreed that her termination would be effective as of June 3, 2022. (Dkt. 39 ¶ 5.)

On June 1, 2022, Pamela used a 5-terabyte (“TB”) Seagate Portable Drive (“the Pamela Seagate Drive”) to access NAMSA's “Q:\APSNetwork.” (Dkt. 28 ¶¶ 14-19; Dkt. 185-3 ¶¶ 9, 62-63, 67.) This folder contained NAMSA's Minnesota facility's QuickBooks accounting records, including what NAMSA describes as its financial and accounting database, comprising detailed customer and vendor financial records and contacts, financial analytics regarding profitability, and the general ledger. (Dkt. 28 ¶ 19; Dkt. 185-3 ¶¶ 9, 62-63, 67; Dkt. 186 ¶ 16.) She copied files from this location to the Pamela Seagate Drive, creating corresponding folders on the Pamela Seagate Drive. (Dkt. 185-3 ¶¶ 9, 62-63, 67.)

The NAMSA entities state that NAMSA used the QuickBooks accounting software until November 1, 2023. (Dkt. 186 ¶ 16.) They further state that “[b]ecause these QuickBooks records contain highly sensitive financial information that could erode NAMSA's competitive advantage if disclosed to a competitor, NAMSA keeps them confidential and takes measures to protect them.” (Dkt. 186 ¶ 20.) The NAMSA entities explained that NAMSA “preserves its historic QuickBooks accounting records, including backup copies for several years” because “they are still relevant and sometimes needed for ongoing business and client relationships.” (Dkt. 186 ¶ 21.) NAMSA states that these records “would still be enormously valuable for a startup CRO hoping to compete with NAMSA for talent and clients.” (Dkt. 186 ¶ 23.)

Pamela testified during her April 11, 2024 deposition that she downloaded NAMSA's QuickBooks file to the Pamela Seagate Drive and took it with her when she left NAMSA. (Dkt. 185 at 92:18-22, 94:4-10.) She further testified that she did so in case NAMSA lost access to QuickBooks after it transitioned to the new accounting software, but no one instructed her to do so and she did not tell anybody that she was doing so. (Dkt. 185 at 93:17-94:3.) In a declaration signed on May 24, 2024, Pamela stated under penalty of perjury that:

I downloaded a QuickBooks file prior to my departure, but it had nothing to do with any competitive activity. Around the time of my departure from NAMSA, I understood that NAMSA was transitioning their accounting software away from QuickBooks to a different system and would no longer have access to QuickBooks files. Given this, it was necessary to preserve the QuickBooks file to provide support for my personal tax returns and also the tax returns for APS, if Mike or I were to be audited. I did not download or preserve the QuickBooks file for any competitive purpose, and in fact have not accessed this file since I downloaded it while still employed at NAMSA in early June 2022.

(Dkt. 250 ¶ 19.)

NAMSA's forensic expert Kevin Faulkner stated in a declaration signed on February 2, 2024 that on June 2, 2022, the files and folders containing this accounting information on the Pamela Seagate Drive were accessed and interacted with. (Dkt. 28 ¶ 23.) Pamela and Michael's forensic expert Mark Lanterman stated in a declaration filed on May 24, 2024 that the June 2, 2022 access occurred from Pamela's NAMSA laptop. (Dkt. 230 ¶ 34.) Lanterman further stated that there is no evidence that these files were accessed after June 2, 2022, accessed from Pamela's personal laptop, or copied to any other source or computer. (Dkt. 230 ¶¶ 33-35.) Although the NAMSA entities describe this copying and access in their brief, they do not appear to argue that these files were accessed after June 2, 2022, nor do they allege Pamela spoliated these files. (See Dkt. 153 at 12-13 (describing copying and access), 24-25 (not identifying QuickBooks files as spoliated evidence).)

According to the February 2, 2024 declaration of NAMSA's expert Faulkner, between June 2 and 10, 2022, Pamela and IT staff at NAMSA exported or attempted to export several PST^[5] (Outlook) files to the Pamela Seagate Drive and other external devices. (Dkt. 28 ¶¶ 24-27.) Ultimately, on June 10, 2022, a member of NAMSA's IT staff exported email from one folder in Pamela's email mailbox named “Emails/Folders to Export” to a PST file named “exportofemail.pst” (“the PST file”) at 5:05 p.m. (Dkt. 28 ¶ 26.) On the same day, the PST file was copied to an external USB SanDisk drive having a serial number containing “5045” (the “5045 SanDisk Drive”). (Dkt. 28 ¶ 26.) Then, on June 14, 2022, the PST file was copied to Pamela's personal laptop and opened. (Dkt. 230 ¶¶ 36-37.) A copy of the PST file continued to reside on Pamela's NAMSA laptop and was available for Faulkner's examination to determine what email messages and attachments were included. (Dkt. 28 ¶ 26.) In total, the export contained 2.68 gigabytes (“s”) of data, consisting of 6,387 email messages and 3,679 attachments. (Dkt. 28 ¶ 28.) The files included information that NAMSA considers to be confidential and trade secret business information. (Dkt. 185-4 ¶ 12.)

Pamela attached emails to her May 24, 2024 declaration showing her communications about these exports with NAMSA's IT staff between June 1, 2022 to June 3, 2022. (See Dkt 218.) NAMSA's expert Faulkner stated in his February 2, 2024 declaration that the IT staff reported to Pamela (Dkt. 28 ¶ 24), but Pamela stated in her May 24, 2024 declaration that they did not report to her (Dkt. 250 ¶ 21; see also Dkt. 185 98:5-9 (Pamela testifying that IT staff did not report to her after the sale because she was no longer the Chief Information Officer)). Pamela testified during her deposition that she did not...