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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Legal Standards For Evaluating A Petition To Award Attorneys’ Fees To A Defendant In A Trade Secret Misappropriation Case

Posted in Trade Secrets

Section 4 of the Uniform Trade Secrets Act provides, in part, that if "a claim of misappropriation is made in bad faith . . . the court may award reasonable attorney’s fees to the prevailing party." The terms "bad faith" and "prevailing party" are not defined in the statute. Most of the few judicial opinions interpreting those terms as they are used in the UTSA in relation to an award of fees in favor of a defendant are not officially reported.

A recent California appellate decision found that the trial court applied the correct interpretation of section 3426.4 (California applicable trade secret attorneys’ fee statute) and did not abuse its discretion in finding "bad faith" on the part of the plaintiff in bringing its trade secret misappropriation claim against defendants and awarded over $400,000 in attorneys’ fees. For a nice summary of the case, please see John Marsh’s blog post. The applicable case law construing the trade secret attorneys’ fees statute in each state must be carefully analyzed to understand when attorneys’ fees are recoverable in trade secret cases.

1. Bad Faith

A majority of such cases hold that a determination of "bad faith" requires that both objective and subjective tests are met (a few decisions suggest that fee shifting may be permissible if either the objective or the subjective test is met without requiring both). The objective component of "bad faith" refers to a baseless complaint. The subjective component refers to egregious behavior in filing or pursuing misappropriation litigation.

To qualify as a specious pleading, the complaint must be unsupported by facts. The absence of relevant evidence favoring the plaintiff has been held to be a strong indicator of frivolousness, but a reasonable belief that the claim was colorable when it was filed may defeat a motion for the award of fees to the defendant.

With regard to the subjective "bad faith" standard, an illicit motive in filing or pursuing specious litigation has been found where, for example, one or more of the following acts occurred:

a. The plaintiff filed the litigation in an attempt to interfere with the defendant’s existing customer relationships which pre-dated the alleged misappropriation;

b. The plaintiff made no substantial effort to retrieve the allegedly misappropriated trade secrets (for example, there was a lengthy and unexplained delay in seeking injunctive relief);

c. The plaintiff was guilty of spoliation of key evidence;

d. The plaintiff changed the theory of the case each time the defendant successfully rebutted a prior theory;

e. The plaintiff unreasonably refused to produce, until after repeatedly being ordered to do so, internal communications that proposed vexatious, oppressive litigation tactics against a competitor; or

g. The plaintiff engaged in pretrial tactics designed primarily to increase the defendant’s cost to defend.

One of more of these activities may be sufficient to meet the subjective test.

2. Degree of Proof

A minority of courts have written that a trade secrets misappropriation defendant seeking attorneys’ fees must support the objective and subjective factors with "clear and convincing" evidence. In making the determination as to the applicable degree of proof, courts have considered whether an enhanced quantum is required for a fee-shifting decree in cases brought under such statutes and rules as a jurisdiction’s Insurance Code relating to an insurer’s bad faith refusal to defend or settle; Rule 11 of the Federal Rules of Civil Procedure, 28 U.S.C. ¶1927, or state counterparts; or 35 U.S.C. §285 concerning permissive attorneys’ fees awards to the prevailing party in "exceptional" patent infringement litigation.

3. Prevailing Party

A trade secrets misappropriation defendant obviously would be the "prevailing party" after the entry of a final, non-appealable judgment dismissing all contested claims. But does the defendant qualify for an award of attorneys’ fees if, say, after lengthy pretrial proceedings but before trial, the plaintiff voluntarily dismisses most of a misappropriation complaint without receiving any consideration? After a trial the court or jury awards the plaintiff only a nominal sum despite a demand for an exorbitant amount? The defendant prevails with respect to the trade secrets misappropriation claim, but the plaintiff is prevails in connection with a separate count filed by the plaintiff or regarding a counterclaim filed by the defendant?