Court Rules Pennsylvania Trade Secrets Act Entitles Defendants To Attorneys' Fees For Bad Faith Misappropriation Claim
By Justin Beyer
In a matter of first impression, Judge William Standish of the Western District of Pennsylvania ruled in Best Medical Int’l, Inc. v. Spellman, 07-cv-01709-WLS, 2011 U.S. Dist. LEXIS 147853 (W.D. Pa. Dec. 22, 2011), that, pursuant to the Pennsylvania Uniform Trade Secrets Act (“PUTSA”), a defendant may recover attorneys' fees against a plaintiff where the plaintiff filed an objectively specious misappropriation of trade secrets claim and subsequently engaged in subjective misconduct during the course of discovery.
At issue in this case was Best Medical’s claims that four of its former employees (Hill, Spellman, Scherch, and Bittman) misappropriated Best Medical’s trade secrets and provided those trade secrets to Accuray, Inc. Accuray and Best Medical are competitors in the radiation treatment planning and image guided therapy systems industry.
In December 2007, Robert Hill filed suit against Best Medical claiming Best Medical denied him severance benefits after his job responsibilities were reduced due to corporate downsizing. Following what Hill claimed was his constructive discharge, Hill went to work for Accuray, Inc.
Best Medical counterclaimed, alleging, among other claims, that Hill misappropriated Best Medical’s confidential and trade secret information. In March 2008, Hill and Best Medical agreed to a stipulated motion for permanent injunction. Included amongst the terms of the permanent injunction, Hill agreed to return all Best Medical documents in hard copy form and submit his electronic storage devices to forensic examination, permit an image of his computer to be taken, and permit the alleged trade secrets and confidential information to be deleted from his computer. At no point during the remainder of the litigation did Best Medical claim that Hill violated the stipulated permanent injunction in any way.
In October 2008, Best Medical filed suit against Spellman, Scherch, and Bittman (the “Spellman Defendants”), all former Best Medical employees, and Accuray, alleging breaches of contract, tortious interference, and violations of PUTSA. Like Hill, the Spellman Defendants and Best Medical entered into a stipulated permanent injunction, also requiring the Spellman Defendants to turn over their electronic devices for review, imaging, and deletion of Best Medical’s documents found on the computers.
The parties then engaged in nearly a year of settlement negotiations, which eventually culminated in Best Medical filing another complaint against Hill, the Spellman Defendants, and Accuray. In May 2010, Accuray filed a series of motions to compel seeking a definitive answer from Best Medical as to the trade secrets Best Medical claimed had been misappropriated and which Best Medical further claimed Accuray was using to Best Medical’s detriment.
Over the course of another year, Best Medical stonewalled on answering that question, until two 30(b)(6) deponents, presented by Best Medical, conceded that Best Medical: (a) could not identify the trade secrets that Accuray allegedly misappropriated; (b) had not investigated its misappropriation claim prior to filing suit; and (c) did not have any evidence of Accuray misappropriating and improperly using Best Medical’s trade secrets.
Following the court’s grant of summary judgment in October 2011, Accuray and the Spellman Defendants sought recovery of attorneys’ fees spent defending the misappropriation claims based on three theories:
(1) Best Medical violated PUTSA, 12 Pa. C.S. § 5305(1), which requires that “attorneys fees, expenses and costs [may be recovered by] the prevailing party: (1) if a claim of misappropriation is made in bad faith;”
(2) Best Medical violated 28 U.S.C. § 1927, which requires that: “Any attorney or other person admitted to conduct cases in any court of the United States … who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct;” and
(3) that the court possessed the inherent power to sanction Best Medical and award attorneys fees to Accuray and the Spellman Defendants due to Best Medical’s litigation conduct.
Finding no Pennsylvania case interpreting 12 Pa. C.S. § 5305(1), the court relied heavily on other states’ interpretation of their own versions of the Uniform Trade Secrets Act. The court decided to follow and apply a two-part test rendered by the California Court of Appeal in Gemini Aluminum Corp. v. Cal. Custom Shapes, Inc., 95 Cal. App. 4th 1249, 1262 (Ct. App. 2002). In Gemini, the California Court of Appeals ruled that, to merit an attorneys fee sanction against the plaintiff, the defendant must prove: (1) the “objective speciousness of the plaintiff’s claim;” and (2) “subjective bad faith in brining or maintaining the claim.” 2011 U.S. Dist. 147853, at * 10, citing Gemini, 95 Cal. App. 4th at 1262.
Defining “objective speciousness,” the Best Medical court cited to decisions from the District of Maryland and the Southern District of California, in which those courts held that “objective speciousness exists where there is a complete lack of evidence supporting plaintiff’s claims.”
The Best Medical court also defined what constituted “subjective misconduct” finding it “exists where a plaintiff knows or is reckless in not knowing that its claim for trade secret misappropriation has no merit.” 2011 U.S. Dist. LEXIS 147853, at *12.
After also considering a defendant’s burden of proof to show that attorneys’ fees should be awarded under 28 U.S.C. § 1927 or the court’s inherent power, the court analyzed why an award was appropriate pursuant to PUTSA. The court found that Best Medical acted in bad faith, and relied heavily on three salient facts; namely:
(1) that Best Medical possessed images of the Spellman Defendants’ computers since November 2008, but failed to analyze those computers;
(2) that an affidavit from Best Medical’s president, which indicated that Best Medical was: (a) always ready, willing and able to assist counsel in the prosecution of this matter; (b) monitored its counsel’s activities throughout the litigation; and (c) identified to counsel at the outset of the litigation the trade secrets at issue; was essentially unreliable and not supported by the facts of the case; and
(3) that Best Medical’s 30(b)(6) witness admitted in May 2011 that Best Medical did not investigate its misappropriation claims thoroughly before it filed its complaint against Accuray and the Spellman Defendants.
The court concluded that Accuray and the Spellman Defendants were entitled to all of their attorneys’ fees incurred as a result of defending the PUTSA claims. The court did not reach the other arguments based on 28 U.S.C. § 1927 or the inherent powers of the court.
While the reach of this decision is not yet apparent, it is important to note that Pennsylvania now joins other states, including, California, Maryland, Minnesota, and Michigan, in finding that a defendant may recover attorneys' fees where a plaintiff brings or maintains a misappropriation claim in bad faith. See 2011 U.S. Dist. LEXIS 147853, at * 10-12. As seen from the above factual recitation, however, it also appears that a plaintiff must act quite egregiously and lack any evidence of misappropriation before a Pennsylvania court will award attorneys' fees.
