When negotiations for acquisition and licensing fell through between Swarmify and Cloudflare in 2017, Swarmify brought several claims against Cloudflare, including state and federal claims for misappropriation of trade secrets.
Swarmify, a startup developing video streaming technology, first entered into negotiations with Internet content-delivery giant Cloudflare in 2016. After a second round of acquisition talks in June of 2017 failed to produce an agreement, Swarmify returned to the development of its technology. Three months later, Cloudflare posted two blog articles on its website detailing the introduction of its new video streaming solution to the market. These two blog posts are the main basis for Swarmify’s claims against Cloudflare.
The blog articles, titled “Introducing Cloudflare Stream” and “How Cloudflare Streams” explain how Cloudflare’s streaming technology works, which, according to Swarmify’s complaint, is based entirely on confidential information obtained during the failed negotiations, used in violation of mutual NDAs. Relying solely on its trade secret misappropriation and breach of contract claims, Swarmify then filed a motion for preliminary injunction.
The preliminary injunction
Swarmify accompanied its motion for preliminary injunction with disclosures that Judge Alsup of the Northern District of California described as “overbroad” and “an abuse of the system.” In addition, the court noted that Swarmify repeatedly refused to “pin down in argument the specific nature of the information it claims to own.” In light of these “glaring” issues the court viewed as preclusive to preliminary relief under Winter, no holding on the merits was reached. However, the court clearly expressed its skepticism regarding Swarmify’s trade secrets claims, stating that “Swarmify’s attempts to set up its purported trade secrets as elusive moving targets do not bode well for the merits of its claims.”
Swarmify attempted to justify its irreparable harm argument with a comparison to recently decided Waymo. However, Judge Alsup, who “lived through Waymo,” explicitly distinguished Swarmify’s case from Waymo, which concerns self-driving cars, an industry that is actually “nascent” and may be irreparably harmed by disruption (unlike the video streaming industry). Furthermore, the court referred to the harm alleged by Swarmify as “textbook reparable harm” in the event of a success on the merits and accordingly, denied the motion on February 27, 2018.
Find the denial of the preliminary injunction here.
Cloudflare gets (some) fees
Swarmify moved to end the case in June 2018, prompting Cloudflare to move for attorney fees accrued in the period following the denial of the preliminary injunction. After taking Cloudflare’s motion under submission on September 20, the court issued its partial grant on September 28.
The court applied the two-pronged standard for “bad faith” in the context of trade secret claims, which requires the seeking party to show (1) objective speciousness and (2) subjective bad faith in bringing or maintaining the claim. The court found that the turning point in the litigation—at which Swarmify should have immediately sought dismissal—was not the denial of the preliminary injunction, but the parties’ mediation this past May. At the mediation, Cloudflare presented a new defense that “unquestionably rendered Swarmify’s misappropriation claim objectively specious.” After Cloudflare proved its new defense on May 22, Swarmify was “ethically obligated to drop its misappropriation claim,” but “instead attempted to settle (and thus extract some gain from Cloudflare) before offering to freely dismiss the case.” The court thus concluded that Swarmify maintained the action in bad faith and awarded Cloudflare attorney’s fees and costs for the period from May 23 to June 10.
Find the order granting in part the motion for attorney’s fees here.
The case serves as a reminder to trade secret plaintiffs of the risk of fee awards where the plaintiff is aware that its trade secret claim lacks merit.