As HousingWire (and others) reported earlier Wednesday, a Washington state judge handed down a ruling in the pre-trial proceedings of the legal battle between Move and Zillow over the alleged theft of trade secrets.
Both sides claimed that they’re happy with the judge’s ruling. But why?
So, here’s a quick summary of the lawsuit that’s cost two of the largest players in online real estate tens of millions of dollars already, with the prospect of far more significant financial consequences looming.
The lawsuit
Move, which operates Realtor.com for the National Association of Realtors and is now owned by News Corp, claims that Zillow owes the company $2 billion in damages over allegations of trade secret theft involving Errol Samuelson, who was once Move's chief strategy officer.
Move sued Zillow after Samuelson resigned from Move on March 5, 2014, and joined Zillow as the company's second-highest paid executive on the same day.
Move filed suit against Zillow after Samuelson left, alleging that Samuelson, and by extension Zillow, stole trade secrets and proprietary information. Further, Move alleges efforts to cover up the claimed theft.
The original lawsuit alleged breach of contract, breach of fiduciary duty and misappropriation of trade secrets and accused Samuelson of misappropriating trade secret information by acquiring it using improper means, and by copying it without authorization.
The lawsuit was eventually expanded to include Curt Beardsley is a former Move employee. He is now vice president of industry development at Zillow.
The ruling, handed down by Judge Sean O’Donnell earlier this week, dealt with a “spoliation” hearing that took place last month.
At issue in that six-day hearing that included testimony from Zillow Group CEO Spencer Rascoff, Samuelson, Beardsley and more, was whether Zillow, Samuelson and/or Beardsley destroyed evidence related to the lawsuit that would have negatively impacted Move’s ability to receive what it felt would be a fair trial.
Specifically, Move claimed that Zillow, Samuelson and Beardsley destroyed evidence stored on various devices (hard drives, other portable storage devices, computers) after the initial lawsuit was filed, in clear violation of the court’s instruction to the contrary.
So after a six-day hearing that included accusations being thrown in any and all directions, O’Donnell handed down his ruling, and both sides are happy about it.
Why? Well, both sides won, and lost.
The ruling
O’Donnell ruled that Zillow did not act “willfully or in bad faith with respect to any evidence allegedly lost to due to spoliation.”
O’Donnell went on to say that there was no evidence presented during the hearing that proved that Zillow was in possession of any of the “so-called missing storage devices” that belonged to Beardsley or Samuelson, nor did Zillow have any knowledge of Beardsley or Samuelson allegedly deleting, reformatting or copying any of the files in question.
O’Donnell said that Zillow took “early and appropriate” steps to notify its employees, including Samuelson and Beardsley, of their obligations to preserve evidence after the lawsuit’s filing.
“In short, the evidence does not support a finding that Zillow acted willfully or in bad faith to withhold evidence from the plaintiffs,” O’Donnell wrote. “It did not perform deletions; its did not hide or lose devices; and it notified its employees of their duty to preserve evidence through a litigation hold issued the same date Move filed its lawsuit.”
As for Samuelson, the judge found that the evidence presented “does not support” a finding that Samuelson was “under a duty” to preserve evidence prior to the filing of the lawsuit.
As O’Donnell writes, Samuelson held a series of conversations with Zillow and its executives prior to his departure from Move. Part of those conversations included an indemnification agreement that was to be included in Samuelson’s contract with Zillow.
O’Donnell writes that neither Samuelson’s negotiations with Zillow nor his indemnification agreement show that he had notice or expectation that a lawsuit was going to be filed, therefore he was under no obligation to preserve the alleged evidence.
According to the ruling, Samuelson did “attempt” to copy the contents of his Move-issued computer to a USB memory device and then made attempts to delete the contents of his Move-issued Apple devices, including his computer.
O’Donnell wrote that Samuelson’s efforts to delete the contents of his Move devices were not conducted in “bad faith or with a willful intent” to prevent Move from obtaining evidence of the alleged trade secrets theft.
“(Samuelson’s) explanations regarding why he took steps to delete information are not, as plaintiffs suggest, incredible,” O’Donnell wrote. “It was uncontested that he had personal information on his Move devices, including personal tax information, family photographs, family medical history and the like. His explanation that he did not want to his soon-to-be former employer retaining this information was reasonable.”
So Zillow’s and Samuelson’s hands appear clean, at least in regards to the alleged destruction of evidence. And Zillow is pleased about that.
Beardsley, on the other hand, didn’t fare quite so well in O’Donnell’s eyes, and Move is pleased about that.
Click "page 2" or "next" at the bottom to read all about what the judge ruled that Beardsley did and what Move and Zillow think about the ruling.
Beardsley’s actions
According to O’Donnell, Beardsley’s hands are “unclean” in regard to the destruction of certain evidence in the case.
During the hearing, Move attempted to prove that Beardsley destroyed evidence despite being prohibited from doing so by the court, and O’Donnell agreed with Move’s contention in several instances.
“With respect to his handling of certain devices and information, Mr. Beardsley’s conduct was willful and in bad faith and is sufficiently prejudicial to warrant the provision of a jury instruction or instructions related to the lost or missing evidence,” O’Donnell wrote.
So what does that mean in layman’s terms?
Basically, that means that when the trial begins early next month, the judge will tell the jury that they are allowed to “infer the missing evidence would have benefited (Move’s) case or alternatively hurt (Zillow’s).”
At issue with Beardsley is his willful destruction of Move intellectual property as part of an effort to cover up the fact that he used “hard-core pornography” on his Zillow computer.
O’Donnell writes that Beardsley was “put on notice” in March 2014 that his was obligated preserve evidence in the case, but despite receiving that notice, Beardsley ran several computers designed to wipe his computers of various files and histories.
“(Beardsley’s) testified that he used these programs to cover his hard-core pornography use,” O’Donnell writes. “The court finds that Mr. Beardsley’s explanation – that he was embarrassed to reveal his pornography use – likely. But the logical corollary to his decision to delete pornography is that he would be equally motivated to cover up his alleged perfidy in connection with misappropriated Move documents.”
O’Donnell writes that in the fall of 2014, Beardsley researched how to delete files from computers, hard drives, and other electronic devices.
Then, using his software development experience, Beardsley wrote a program that included a “Cipher” command, which is a command that “indiscriminately overwrites” all unallocated space on a hard drive.
Basically, a Cipher command will erase files that have been marked for deletion and make them “more difficult to find,” O’Donnell writes, adding that the Cipher command wipes all deleted data and does not distinguish between pornographic content and all other content – a fact that O’Donnell states Beardsley knew.
O’Donnell writes that this action happened multiple times on his home computer and once on his Zillow computer after being told to preserve evidence for the lawsuit.
According to O’Donnell’s ruling, Beardsley ran the Cipher program on his home office computer on June 14, 2014; Aug. 10, 2014; Oct. 11, 2014; May 2, 2015; June 13, 2015; and July 18, 2015; and ran it on his Zillow computer on Sept. 29, 2014.
Now, O’Donnell notes that Move has not pointed to any specific evident lost or likely lost because of Beardsley’s deletions, but rather asked the court to presume that the evidence allegedly destroyed was “important and material to their case.”
But O’Donnell states that the “likely deletion of evidence” via the cleanup programs is further evidence of Beardsley’s “bad faith conduct.”
There were several devices in question relating to Beardsley’s supposed deletion of evidence, but the situation surrounding one of the particular devices borders on ridiculous.
O’Donnell writes that evidence shows that Beardsley copied a series of documents from his Move-issued Dell laptop to an external hard drive prior to leaving Move.
Beardsley admitted to destroying the hard drive, but claims he did so in manner that the judge didn’t exactly buy.
In O’Donnell’s words:
Mr. Beardsley claims he destroyed the Western Digital hard drive in a pique of anger in September 2014, well after notice of his duty to preserve it. He described the hard drive sailing through the air and smashing against the wall of his workshop. In contrast to Mr. Beardsley’s tame presentation at the spoliation hearing, the details of the drive being “smashed” into a wall after a Herculean heave strain credulity.
O’Donnell writes that the destruction of the hard drive is a result of Beardsley’s “willful and bad faith conduct,” but O’Donnell adds that Move knows what Beardsley copied to the hard drive, when he downloaded it and that the loss of the data from the hard drive presents “marginal prejudice” to Move’s case.
Also at issue with Beardsley is a report taken from Move entitled “MLS EAC.” During the hearing, Beardsley admitted to opening the MLS report “multiple times” while working at Zillow and likely using some of the data in that report to create materials at Zillow.
Both sides react
So why are both sides happy? Here’s each in its own words, via statements provided to HousingWire in the wake of the ruling.
Move:
This important ruling validates our claim that one of Zillow’s top executives, Curt Beardsley, acted with “willfulness and bad faith” in destroying evidence, and his actions have “prejudiced plaintiffs’ ability to prosecute their case.”
We welcome the judge’s decision that there will be a jury instruction, which will allow the jury to “infer the missing evidence would have benefited plaintiff’s case or alternatively hurt the defendant’s.”
The judge also addressed Mr. Beardsley’s claim that his misconduct was motivated by his embarrassment about pornography use by noting that “the logical corollary to his decision to delete pornography is that he would be equally motivated to cover up his alleged perfidy in connection with misappropriated Move documents.”
Today’s decision, when combined with the powerful evidence that has not been destroyed, will help us prove our case that our trade secrets were stolen and abused by the defendants to their advantage.
This case has cost Zillow – and their shareholders – more than $40 million so far, making the two poached executives among the most expensive in corporate history. And one of those senior executives was found by this court to have engaged in “egregious” conduct that represents “an undermining” of the principles which make our system of justice work: “honesty, fairness and compliance with the rule of law.”
That Zillow, which has known of such wrongful conduct for many months, has continued to employ someone like this as one of its chief ambassadors to the real estate industry raises serious questions.
We look forward to presenting all these issues to the jury beginning on June 6. We believe that this decision is an important first step toward holding the defendants accountable for their harmful and unlawful behavior.
Zillow:
We applaud the Court’s decision with respect to Zillow, which validates what we already knew: that during the pre-trial hearing, News Corp did not offer evidence that Zillow did anything wrong or that the company failed to live up to our obligations in this case. We look forward to vigorously defending against the claims in this litigation during the jury trial.
Zillow Group has and will continue to act with the utmost integrity in conducting our business. Ultimately this comes down to News Corp trying to win in the courts, since they aren’t winning in the court of consumer opinion.
We are fully focused on innovating and continuing to grow the most popular real estate network on mobile and Web.
The upshot
So what does this all mean? Well, both sides are happy.
Zillow and Samuelson are in the relative clear in the eyes of the judge, at least in regards to the deleted evidence, which makes Zillow happy.
Move is happy because it believes that O’Donnell’s ruling corroborates its claims that Zillow executives (at least one of them) did indeed delete evidence, whether he meant to do it or not.
And what does it mean for the trial?
Well, as it stands now, the two sides will be in court on June 6 for the real estate trial of the century.
Zillow said recently that it expects to spend between $50 million and $55 million in legal costs this year alone in relation to the Move lawsuit, but Move wants far more than that – $2 billion to be exact.
At this point, given the judge’s findings, it’s entirely possible that Move will achieve some semblance of victory in the trial. But with both sides apparently so eager to get to trial, it’s most likely a toss-up as to which was the jury will lean.
No matter what, the world of online real estate is about to change forever.
