Untitled-1Though an employer may be eager to bring a trade secret claim against former employees as soon as possible, filing suit before properly vetting the claim can lead to serious consequences: a malicious prosecution case against the lawyers who signed the pleadings.

A law firm is fighting such allegations in California after losing at bench trial on behalf of FLIR Systems, Inc. and Indigo Systems Corporation (collectively, “FLIR”), who brought suit against a group of former employees attempting to launch a competing business. Though the California Court of Appeal for the Second District affirmed a lower court’s ruling that the employee’s malicious prosecution suit could not proceed, Parrish v. Latham & Watkins, 238 Cal.App.4th 81 (2015), the California Supreme Court recently announced it will reconsider that decision.

The Underlying Dispute

FLIR developed and sold microbolometers, devices used to detect infrared radiation for infrared cameras, night vision, and thermal imaging. In 2004, while still working for FLIR, the group of employees presented FLIR with a business plan to outsource microbolometer manufacture. When the group left to form another business in 2006, FLIR believed their plan to launch a new business had to have incorporated intellectual property owned by FLIR.

The former employees had several meetings with FLIR to ensure the company that they had no intention of using its intellectual property. The business plan they were using had been created by one of the individuals prior to joining the company and involved licensing the necessary intellectual property from a third party.

FLIR was nonetheless convinced that the new business plan “necessarily presume[d]” use of its trade secrets and filed suit. In support of its position, FLIR presented two brief expert declarations stating that the experts were unaware of any third parties in the infrared market other than FLIR with the requisite intellectual property, and concluded that this meant FLIR’s ex-employees “could not pursue” their business plan without the use of FLIR’s trade secrets.

The trial court denied the employees’ motion for summary judgment, finding that although they “made a compelling argument” that they were entitled to summary judgment, the concepts involved in the litigation were “highly technical” and merited further review. However, the same judge who had denied summary judgment ruled in the employees’ favor after a bench trial, not only denying FLIR any relief but also finding that FLIR had brought and pursued the action in bad faith and should pay more than $1.6 million in attorney fees.

Trial Court Finds Bad Faith

The court pointed to the fact that California law does not recognize the “inevitable disclosure” theory, which permits a trade secret owner to prevent a former employee from working for a competitor despite the owner’s failure to prove the employee has taken or threatens to use trade secrets, as long as it can be demonstrated that the employee’s new job duties will inevitably cause the employee to rely upon knowledge of the former employer’s trade secrets. While FLIR’s former employees had raised a “reasonable suspicion that they might misuse [FLIR’s] trade secrets,” the court concluded that “reasonable suspicion” is not an adequate basis for relief under the Uniform Trade Secrets Act.

The court noted that its earlier denial of the employees’ summary judgment motion did not preclude it from ruling that the action had been brought in bad faith, an issue that was not pertinent at that stage, as the court had not yet heard all the evidence or considered witness credibility. After the bench trial, it became clear to the court that FLIR had been “unwilling to take the risk that [the former employees] might be able successfully to complete without misuse of [FLIR’s] trade secrets.” The court made several findings consistent with objective and subjective bad faith, including that FLIR:

  • “unreasonably discounted ways in which [the former employees] could have proceeded with their new company lawfully;”
  • “downplayed” the former employees’ plans to license technology from a third party and to make sales to that third party; and
  • “failed to take reasonable measures to ally [its] fears by learning more about [the former employees’] plans.”

In fact, three of FLIR’s witnesses testified at trial that they did not know at the time the lawsuit was filed that the former employees planned to work with a third-party company, and that, “had they known such facts, their concerns regarding [the former employees] would have been allayed.”

Malicious Prosecution Case Pending

The trial court’s award was affirmed on appeal, and the employees brought an action against FLIR’s law firm for malicious prosecution. They asserted that the firm pursued the action even though they knew the legal basis for their theory, inevitable disclosure, was discredited in California, and even though they knew that FLIR had an anti-competitive purpose in suing them.

The California Court of Appeal has held that the malicious prosecution claim is barred by the “interim adverse judgment rule,” which holds that the denial of a dispositive motion on the merits in an underlying action precludes the maintenance of a subsequent malicious prosecution action. In other words, because the trial court had denied the former employees’ motion for summary judgment before granting judgment in their favor, there was probable cause for the underlying trade secret suit, and thus no basis for malicious prosecution.

However, the California Supreme Court’s decision to rehear the case means the firm is not yet off the hook. Hopefully, whatever the outcome, the Supreme Court’s opinion will provide guidance for trade secret litigators trying to zealously advocate for their client without putting both the client and themselves at risk.