Take Note

A Cautionary Tale in Business Litigation

ATTENTION EMPLOYERS: Thinking about bringing a misappropriation of trade secrets claim? Think twice. Based on the California Court of Appeal's decision in Flir Systems v. Parrish (2008) 174 Cal. App 4th 1270, employers should both thoroughly investigate and objectively analyze the reasons for bringing a misappropriation claim before filing, otherwise it could be quite costly.

Section 3426.4 of the California Uniform Trade Secrets Act (CUTSA) provides "[i]f a claim of misappropriation is made in bad faith . . . the court may award reasonable attorney's fees and costs to the prevailing party." "Bad faith" has been interpreted by the courts to require a showing of: 1) objective speciousness of the claim; and 2) subjective bad faith in bringing or maintaining the action. In other words, if the litigation is brought for an improper purpose, the plaintiff rather than the defendants can be forced to pay.

Summary of Facts

In Flir Systems, the employer sued two former employees who began their own start-up company to mass-produce the same device which the employer manufactured and sold. The employer refused an offer of a non-controlling interest in the start-up company, wished them luck, and received assurance that the employees would not misappropriate its trade secrets but instead would lawfully acquire the necessary technology. Nevertheless, upon learning that the employees were negotiating with a third party to obtain licensing, technology, and manufacturing facilities, the employer sued on the premise that the former employees could not possibly produce the devices without misappropriating its trade secrets. As a result of the lawsuit, the third party terminated negotiations and the start-up company was subsequently abandoned.

Objective Speciousness

In affirming an award of over $1.6 million in fees and costs for the former employees, the appellate court found that the employer's lawsuit was objectively specious. Although it superficially appeared meritorious - substantively it was devoid of evidence to support the misappropriation claim. The court held that in reality, the suit was fueled by an anti-competitive motive, as evidenced by the CEO's statement "we can't tolerate a direct competitive threat" and other similar manager statements. Furthermore, there was no evidence of actual or threatened misappropriation or economic harm. Instead, the employer's claim was based on "reasonable suspicion" of trade secret misuse, which the court found to be a thinly disguised "inevitable disclosure" argument - a doctrine which is not the law in California.

Subjective Bad Faith

The court also found that the employer's lawsuit was subjectively brought in bad faith. Subjective bad faith can be difficult to prove but can be inferred. Improper motive such as intent to harass or cause unnecessary delay can be inferred from the timing of the action, or when proceedign with the action despite its fatal flaws being revealed. In holding that the Flir Systems suit was brought in subjective bad faith, the court looked to a number factors. Among the most notable, the court stated that former possession of information on a portable hard drive which was destroyed before suit was filed by one former employee was not equivalent to threatened misappropriation as the employers claimed. Also, the employer conspicuously did not specify what trade secrets were subject to being enjoined and the injunction wrongfully attempted to prohibit lawful activities in restraint of trade. Further, the employer's settlement tactics were inflammatory, violative of public policy, and made in bad faith. Finally, the court placed significant weight on the testimony of fellow employees, who attested that the defendant former employees were honest and trustworthy. The court also rejected the employer's arguments that the fact that the defendants' pretrial motions were denied suggested a lack of bad faith.

Takeaway Message for Employers

Suits for misappropriation of trade secrets can be based on actual or threatened misappropriation. Those based on threatened misappropriation require a threat of misuse through words or conduct which evidences an imminent harm. As demonstrated by Flir Systems, an employer's suspicion of misuse of a trade secret does not rise to the level of imminent harm, and thus is not an actionable threatened misappropriation. Additionally, suits filed or pursued solely to stamp out the competition will surely bring exposure for fees and costs. As such, employers should be able to point to clear evidence of an actual or threatened misappropriation of trade secrets before filing suit.

All businesses and employers are encouraged to act reasonably and not jump to conclusions when considering trade secret misappropriation litigation. A thorough investigation of the facts indicating an actual or threatened misappropriation should be completed, documented, and presented to legal counsel for an objective analysis. Similarly, employers should review all documents forwarded by their counsel and check in with their legal counsel periodically for an update on case developments. Clear indications that the case is without merit should be researched, analyzed, and appropriately handled. The penalties for filing or maintaining a misappropriation of trade secrets claim in bad faith can be severe.

On a final note, in Flir Systems, a Division President who voted in favor of filing suit despite having no personal knowledge of the former employees' alleged wrongdoing, stated that he did not know why the suit was still ongoing a year and a half later when questioned at trial. This is precisely the situation all employers should aim to avoid.

For more information about advice for your business, contact your legal counsel.