The California Uniform Trade Secrets Act (“CUTSA”) allows for an award of attorney’s fees to the prevailing party on a trade secret misappropriation claim. The statute permits award of attorney’s fees to a plaintiff for a defendant’s “willful and malicious” misappropriation and to a defendant when a plaintiff makes a claim in “bad faith”:
“If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party.…”
Civil Code section 3426.4.
Since there are relatively few published decisions addressing attorney’s fees awards to defendants under the statute, a review of the recent unpublished decision in All American Semiconductor, LLC v. APX Technology Corp., No. G 046605, 2013 Cal. App. Unpub. LEXIS 5718, (Cal. App. 4 Dist. Aug 18, 2013) may serve as a good opportunity to remind prospective plaintiffs of the need to ensure they have a good faith basis for any misappropriation claim before filing suit.
The plaintiff in All American Semiconductor had purchased all the assets of a bankrupt company, and, based on statements in the bankruptcy bid solicitation materials, erroneously believed it had purchased the rights to certain proprietary memory module designs. When the plaintiff was unable to locate any design plans for the memory modules among the bankrupt company’s assets, and no paper files whatsoever, the plaintiff grew suspicious. Upon finding empty directories on the bankrupt company’s computers, the plaintiff concluded that those empty directories must have contained data related to the designs and someone must have erased the data. Based on these mistaken beliefs, the plaintiff filed a nine-count complaint against Richard McCauley, the bankrupt company’s former general manager and vice president, his new company, and APX Technology Corporation — the company that actually designed the memory modules. Among other things, the complaint alleged misappropriation of trade secrets based on the defendants’ supposed misappropriation of the memory module designs.
Discovery, including several depositions, revealed no evidence that the bankrupt company had ever designed any memory modules, let alone had any trade secrets. To the contrary, McCauley testified the bankrupt company did not and could not design the memory modules, as it did not have the software or electrical engineers to do so. Instead, McCauley testified it merely assembled the modules based on designs provided by APX. APX’s president testified that APX owned the designs and provided them to memory module assemblers, including the bankrupt company, on a non-exclusive basis. Finally, an electrical engineer at APX testified he had designed the memory modules using complex computer software.
Based on this evidence, APX moved for summary adjudication on the misappropriation claim. The plaintiff opposed, citing testimony from a former shipping clerk of the bankrupt company stating he believed, without foundation, another employee at the bankrupt company designed memory modules. That employee, however, testified he was not an engineer and did not design the modules. The plaintiff also claimed to have found some evidence on the bankrupt company’s computers of software that could have been used to design memory modules, and offered other speculative testimony suggesting it would have been possible for the bankrupt company to design memory modules if it had the right software and tools, but that he had no knowledge of it ever doing so. Finally, the plaintiff blamed McCauley for its lack of evidence, arguing his new company controlled the bankrupt company’s employees and suggested that they therefore would not provide evidence adverse to their new employer.
Having failed to offer any evidence the bankrupt company ever designed memory modules, the plaintiff submitted a supplemental opposition claiming instead the bankrupt company had purchased the designs from APX citing vague invoices for nonrecurring engineering charges.
The trial court granted summary adjudication in favor of APX and awarded attorney’s fees for the plaintiff’s bad faith prosecution of the misappropriation claim. On appeal, the Court held that the trial court correctly found that the plaintiff failed to provide any evidence it owned a trade secret. Specifically, the plaintiff failed to identify what constituted a trade secret in any alleged memory module design. Instead, the Court held, the plaintiff attempted to show it could have designed memory modules, based on an inference that some scrubbed data could have been software that could be used to design memory modules, and that former engineers could have designed such modules. Missing was any evidence the bankrupt company actually designed the memory modules, or evidence of what part of the design was trade secret and unknown to the public and competitors.
In affirming the attorney’s fee award, the Court explained that the statute does not define “bad faith” and recited case law holding it requires both “objective speciousness” and “subjective bad faith.” “Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.” FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009). “Subjective bad faith” will “rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence.’ ” Gemini Aluminum Corp. v. California Custom Shapes, Inc., 96 Cal. App. 4th 1249, 1263 (2002). Further, subjective bad faith “may be inferred where the specific shortcomings of the case are identified by opposing counsel, and the decision is made to go forward despite the inability to respond to the arguments raised.” Id. at 1264. Subjective bad faith exists where a plaintiff intends to cause unnecessary delay, filed the action to harass, or harbored other improper motives. FLIR Systems, 174 Cal. App. 4th at 1278. Finally, “[a] court may find subjective misconduct by relying on direct evidence of [the] plaintiff’s knowledge during certain points in the litigation and may also infer it from the speciousness of [the] plaintiff’s trade secret claim and its conduct during litigation.” Computer Econs., Inc. v. Gartner Group, Inc., No. 98-CV-0312 TW (CGA), 1999 U.S. Dist. LEXIS 22204, at *18-19 (S.D. Cal. Dec. 14, 1999).
In its analysis, the Court found the trial court could reasonably infer objective speciousness from the plaintiff’s lack of evidence of what constituted its alleged trade secret designs and that the designs were not known to the public or others in the industry. In addition, APX repeatedly argued from the outset that the plaintiff could not identify any trade secrets because the bankrupt company never designed memory modules. Further, the trial court could reasonably infer subjective bad faith from the plaintiff’s prosecution of its claims without evidence, and its shifting theories in opposition to summary adjudication. Finally, the Court dismissed the plaintiff’s argument that the trial court erred in not considering self-serving declaratory statements from its president claiming that it filed the lawsuit “in good faith and without improper motive.” Bad faith cannot be avoided simply by claiming “it appeared at the time of the filing of the action some evidence would be obtained in discovery that would support a misappropriation claim.” SASCO v. Rosendin Electric, Inc., 207 Cal. App. 4th 837 (2012).
Tips for Avoiding “Bad Faith” Misappropriation Claims
All American Semiconductor is an unusual case in that the plaintiff was unable to identify its alleged trade secrets because it never actually received the assets it believed it purchased from the bankrupt company. However, there are still lessons prospective plaintiffs can learn from this case to avoid a similar unpleasant fate.
Most trade secret misappropriation claims arise when an employee with access to trade secrets leaves an employer to go to work for a competitor. Fearing the departed employee will use the former employer’s trade secrets to compete, the initial reaction is often to quickly file suit and seek injunctive relief. Before doing so, it is important to recognize that California has rejected the “inevitable disclosure” doctrine. Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443, 1447 (2002). Thus, mere suspicion of misappropriation is not enough. SASCO, 207 Cal. App. 4th at 844. It is therefore essential to do a thorough factual and legal investigation before filing any misappropriation claim. Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation. If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts. Be mindful that using in-house IT personnel may create potential spoliation issues. Finally, if a defendant identifies alleged problems with a trade secret claim, plaintiffs would be wise to recognize that continuing to pursue the claims without being able to address the identified problems may expose them to bad faith claims if things go south. Gemini Aluminum Corp., 96 Cal. App. 4th at 1264.