On November 13, 2018, the United States Court of Appeals, Fifth Circuit, affirmed the United States District Court for the Western District of Texas’s denial of prevailing party attorneys’ fees in a matter of first impression under the Defend Trade Secrets Act (“DTSA”). In short, the Fifth Circuit held that a dismissal without prejudice of a DTSA case does not support an award of prevailing party attorney’s fees. Continue Reading The Limits of “Taking the Lead Early”: A Dismissal Without Prejudice Will Not Support Defend Trade Secrets Act Attorney’s Fees
In TNS Media Research, LLC v. TiVo Research & Analytics, Inc., 2014 U.S. Dist. LEXIS 155914 (S.D.N.Y. Nov. 4, 2014), the Southern District of New York applied the Supreme Court’s recent Octane Fitness decision in awarding attorney fees to patent defendant Kantar. Octane Fitness v. ICON Health & Fitness 134 S. Ct. 1749 (2014); http://www.seyfarth.com/publications/OMM050114-IP.
The district court also awarded Kantar fees it incurred in successfully defending trade secret misappropriation claims. Did Octane Fitness influence the court’s fee award for the trade secret claim, notwithstanding the different standards for fee shifting between the Patent Act and state trade secret laws?
1. Fee Shifting in Patent and Trademark Cases Under Octane Fitness.
Fee shifting in patent cases is governed by 35 U.S.C. § 285 which reads, in its entirety: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” Octane Fitness seemingly made it easier for patent defendants to obtain fees by setting forth a flexible framework for determining if a case is “exceptional” under 35 U.S.C. § 285:
an “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position … or the unreasonable manner in which the case was litigated.
Id. 1756. In announcing this more flexible interpretation of “exceptional,” the Supreme Court emphasized considering the “substantive strength” of the parties’ claims and defenses, and dispensed with a prior formulation that generally required the defendant to show, by clear and convincing evidence, that infringement allegations were baseless and brought in bad faith. The prior formulation, the Supreme Court reasoned, was “so demanding that it would appear to render § 285 largely superfluous,” given that district courts already possess the inherent power to award fees in cases involving misconduct or bad faith.
Fee shifting in trademark cases is governed by 15 U.S.C. §1117 which reads: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” In other words, the Lanham Act and Patent Act recite the same “exceptional” language, and courts have already proceeded to apply Octane Fitness in trademark cases. See e.g. Fair Wind Sailing, Inc. v. Dempster, Case Nos. 13-3305, 14-1572 (3d Cir., Sept. 4, 2014).
2. Fee Shifting in Trade Secret Cases.
State trade secret statutes do not contain the “exceptional” case language found in the Patent Act and Lanham Act. Instead, trade secret defendants in most states seek fees under Section 4 of the Uniform Trade Secrets Act (“UTSA”), which reads, in relevant part: “[i]f … a claim of misappropriation is made in bad faith … the court may award reasonable attorney’s fees to the prevailing party.” Interestingly, the comment to UTSA Section 4 references following “patent law” in considering fee awards: “patent law is followed in allowing the judge to determine whether attorney’s fees should be awarded even if there is a jury, compare 35 U.S.C. Section 285.”
While New York has not adopted the UTSA, Federal Courts applying New York law can rely on their inherent power to award fees to the defendant. Ransmeier v. Mariani, 718 F.3d 64, 68 (2d Cir. 2013) (“[a] court may exercise its inherent power to sanction a party or an attorney who has acted in bad faith, vexatiously, wantonly, or for oppressive reasons) (quotations omitted). Such inherent power is generally available to federal courts in connection with any type of lawsuit, and is not unlike the UTSA fee shifting language requiring bad faith by the plaintiff.
3. The S.D.N.Y’s fee awards in the TNS Media Case.
The TNS Media case is a technology dispute relating to collecting data on television viewing. The plaintiff (“TRA”) claimed that defendant Kantar engaged in acts of patent infringement and trade secret misappropriation (under New York Law). The district court entered summary judgment in favor of Kantar on both claims and Kantar sought fees from TRA.
In granting Kantar’s motion for fees in connection with the patent infringement allegations, the district court applied Octane Fitness and found the case to be “exceptional” under Section 285, based in large part on the substantive weakness of the patent claims TRA maintained. For example, the court found certain TRA arguments on patent claim construction to be not only wrong, but also sanctionable.
TRA’s proposed construction “does violence to the ordinary grammatical understanding of the past tense.” No correct application of the rules of grammar could have supported TRA’s proposed construction. Thus, TRA’s proposed construction lacked merit and was frivolous. See e.g. Id. at * 24.
The district court continued by awarding Kantar fees in connection with the trade secret misappropriation claims based on its inherent power:
TRA’s analysis lacked critical elements of a claim for trade secret misappropriation. For that reason, TRA’s claims were frivolous. In fact, I find here that bad faith may be inferred because TRA’s claims were “so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose[.]” Id. at *37.
The district court explicitly recognized the difference in legal standards for fee shifting between the patent and trade secret claims — the later requiring bad faith. Yet, similarities in the analyses suggest that the Octane Fitness patent fee shifting standard was influential in the trade secret fee award. For example, both fee awards were driven in large part by TRA’s maintaining claims perceived to be substantively weak:
Kantar, in order to collect any attorneys’ fees or costs for its defense of the patent-related claims, must demonstrate it incurred those fees and expenses as a direct result of TRA’s litigation misconduct or frivolous arguments (as described in this Opinion and Order).
Similarly, with respect to the non-patent-related attorneys’ fees awarded under the Court’s inherent power, Kantar must demonstrate that the fees it seeks to collect are only those fees that directly resulted from its defense against the five trade secret claims that were adjudicated at summary judgment. No fees or costs will be awarded as a result of the trade secret claims dropped subsequent to the April 23, 2013 status conference.
Id. at *39. Also, fee awards in favor of trade secret defendants have not been very common. In fact, a brief survey of the case law proffered by both sides in their briefing did not reveal any examples of a fee award being awarded to a trade secret defendant. Thus, the TNS Media’s decision to award fees on the trade secret count appears to be fairly unique.
4. Octane Fitness’ Impact on Trade Secret Litigation Going Forward.
Given the differences in legal standards, Octane Fitness is not likely to impact trade secret litigation as much as it has impacted patent and trademark litigation. Yet, some impact would not be surprising. For example, prevailing trade secret defendants in non-UTSA states, such as New York, may rely on TNS Media in seeking fees. Trade secret defendants in UTSA states may even consider relying directly on Octane Fitness based on the UTSA’s comment referring to courts following “patent law” for fee shifting guidance.
On Thursday, March 6, 2014 at 12:00 p.m. Central, Michael Wexler, Jim McNairy and Josh Salinas will present Seyfarth’s first installment of its 2014 Trade Secrets Webinar series. They will review noteworthy cases and other legal developments from across the nation this past year in the areas of trade secret and data theft, non-compete enforceability, computer fraud, and the interplay between restrictive covenant agreements and social media activity, as well as provide their predictions for what to watch for in 2014.
The panel will specifically address the following topics:
- Significant federal and state court non-compete, computer fraud, and trade secret decisions, including recent developments concerning how information may lose its protected status as “secret,” damages under the Computer Fraud and Abuse Act, procedural requirements when presenting employees with restrictive covenant agreements, and attorneys’ fees and sanctions for trade secret misappropriation claims brought in bad faith;
- Important legislative efforts, including efforts to strengthen federal criminal trade secret laws, recent states’ legislative proposals concerning non-compete enforceability, and enhanced social media privacy protection laws;
- Noteworthy jury trial verdicts, criminal prosecutions, and criminal sentences for trade secret misappropriation, data theft, and computer fraud;
- Trade secret preemption and courts’ difficulties in grappling with whether the theft of non-trade secret information is actionable in tort;
- Prominent social media cases discussing when social media activity may violate non-solicitation agreements.
There is no cost to access this program, however, registration is required.
If you have any questions, please contact firstname.lastname@example.org.
*CLE credit is available. Seyfarth has applied for CLE credit in IL, NY, and CA. If you would like us to pursue CLE credit in any additional states, please contact email@example.com. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.
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.
Congratulations! You’ve just entered into an agreement to settle your trade secret misappropriation case.
Defendants will pay you money damages, and agree that you may move the court for fees and costs under Civil Code section 3426.4, based upon their alleged willful and malicious misappropriation. Defendants reserve the right to oppose and to tax your costs. Under the agreement, the trial court is to retain jurisdiction over the case to enforce the settlement agreement. You and defendants then dismiss the action, noting “Plaintiff to separately seek recovery of fees and costs, subject to opposition.”
You may now proceed to seek an award of attorney’s fees and costs from the trial court, right?
Agreement? What Agreement?
This was the situation presented in the recent case of Khavarian Enterprises, Inc. v. Commline, Inc., et al. (May 14, 2013) (Case No. B243467). After entering into this agreement, plaintiff moved for attorney’s fees and costs. It also submitted evidence that defendants’ misappropriation was willful and malicious. Defendants filed an opposition and a motion to strike the memorandum of costs.
At the hearing, the trial court refused to consider plaintiff’s motion. The court held that the settlement of the case effectively barred plaintiff from seeking attorney’s fees and costs, thereby nullifying that part of the settlement agreement. The court rejected the notion that, under these circumstances, it could or should review the record to make a finding as to whether defendants’ misappropriation was willful and malicious.
Even with plaintiff’s monetary recovery and the language of the agreement, the court found that plaintiff was not the prevailing party under the provision of California Code of Civil Procedure section 1032(a)(4) defining “prevailing party” as “the party with a net monetary recovery, [or] a defendant in whose favor dismissal is entered.”
Despite having entered into the agreement, defendants argued that the provision was unenforceable because there was no authority or procedure for plaintiff to settle a case under Civil Code section 3426.4, and then ask the court to make a finding of willful and malicious misappropriation.
The court denied plaintiff’s motion for fees and granted defendants’ motion to strike.
Oh, That Agreement . . .
The Second District Court of Appeal reversed.
The Court ruled that the parties’ settlement agreement was legally permissible and required the trial court to exercise its discretion to determine whether plaintiff is the prevailing party and, if so, whether defendants’ acts of misappropriation were willful and malicious, thereby justifying an award of attorney’s fees and costs under Civil Code section 3426.4.
The Court observed that in determining which side was the prevailing party, the parties were not bound by the definition relied upon by the trial court. Instead, under Code of Civil Procedure section 1032(c), in crafting a settlement, parties may agree to standards and procedures to which they wish to adhere regarding recovery of attorney fees and costs — which the Court of Appeal pointed out is exactly what the parties in this case did.
The Court added that there is nothing that legally proscribes a plaintiff, who voluntarily dismisses its case after obtaining a net monetary recovery through settlement, from being the prevailing party. Indeed, the Court pointed out that the language in the agreement, authorizing plaintiff to apply to the court for an award of attorney’s fees and costs, after dismissing the action, could only mean that the parties agreed that plaintiff was the sole potential prevailing party.
The Court went on to find that the only reasonable interpretation of this language in the settlement agreement was that the parties had agreed to submit to a procedure by which the court would use its discretion to determine whether plaintiff was the prevailing party, and if so, whether defendants committed willful and malicious misappropriation. It added that this approach is neither unlawful nor procedurally impossible; and a contrary interpretation would render that portion of the agreement “empty” and “ineffectual.”
Thus, under these circumstances, a trial court may be required to act as fact finder on a post-settlement motion for attorney’s fees. Here, because the dismissal was an action in compliance with and required by the stipulated settlement, it did not deprive the court of jurisdiction to consider the fee and cost motions that were specifically contemplated by the settlement agreement. In fact, the language of the agreement obligated it to do so, even if it meant that the trial court would have to engage in considerable fact finding to make such determinations.
This decision is likely to pave the way for more parties to include provisions in settlement agreements calling for post-settlement determinations by courts as to the right of one side to recover attorney’s fees, not just in the trade secret misappropriation context, but in other areas as well.
On May 17, 2013, a Pennsylvania appellate court, with one of its judges dissenting, ordered that the trial court award attorneys’ fees to a married couple whose neighbors wrongfully accused them of trade secret misappropriation regarding flagstone artwork. Krafft v. Downey, Pa. Sup. Ct. No. 476 WDA 2012 (Donohue, J.).
According to the majority, plaintiffs Jack and Linda Krafft must have known that they did not have protectable trade secrets in their flagstone imaging processes when they alleged that their neighbors, Larry and Jane Downey, violated the Pennsylvania Uniform Trade Secrets Act (PUTSA) by using those processes in their own business. Thus, the court held, the trial court should have made the Kraffts pay the Downeys’ attorneys’ fees spent in defending against the Kraffts’ PUTSA claims for which, by making them, the Kraffts engaged in “subjective misconduct.”
The facts and the trial court’s decision. Between 1995 and 2004, Linda Krafft learned how to transfer artwork images onto flagstone, and refined that process through extensive trial-and-error. In 2004, the Kraffts signed a license agreement with their neighbors, the Downeys, under which the Kraffts taught the Downeys the flagstone imaging process and licensed to them the “Framing on Stone” name. In exchange, the Downeys paid the Kraffts $20,000, and also agreed to pay 10% of the net sales. The agreement prohibited the Downeys from disclosing the imaging process. After the Downeys stopped paying commissions in 2007 and coined their own imaging brand (“Rock of Ages”), the Kraffts sued the Downers in December 2007 in Pennsylvania state court for breach of contract.
In February 2008, the trial court denied the Kraffts preliminary injunction motion, which apparently hinged on whether the Kraffts’ imaging process was confidential. In its written order, the court said that the Kraffts’ process was not secret, was in the public domain, and “is not new or unique to” the Kraffts. The Downeys presented extensive evidence during the injunction proceedings showing that prior flagstone imaging patents had expired, and that a number of books and articles available on the internet described the flagstone imaging process.
Undeterred, the Kraffts subsequently filed an amended complaint, including a PUTSA misappropriation claim. The Downeys filed a counterclaim shortly thereafter under PUTSA section 5(1) for the Kraffts having made a bad-faith claim in light of the court’s prior order. Just under two years later, not long after the Downeys filed a motion for summary judgment on their PUTSA claim, the Kraffts agreed to withdraw it. Nevertheless, the Downeys asked the trial court to award them their attorneys’ fees for having to defend against the PUTSA claim, which the Kraffts knew had no merit. The trial court denied that initial request. The Downeys later renewed that request after the Kraffts obtained a jury verdict against the Downeys for breach of contract (I could not locate the amount of that verdict). The court refused, holding that the Kraffts did not subjectively know they had no viable trade secrets, apparently relying on the two-prong bad-faith test of “objective speciousness” and “subjective misconduct” first used in California federal court in Stilwell Dev. Inc. v. Chen, 1989 WL 418783 (C.D. Cal. Apr. 25, 1989) and applied by a number of federal courts since.
The appeal, majority decision, and dissent. On appeal, the appellate court majority refused to adopt that two-pronged approach. The court pointed out that except for California, the few other UTSA state courts which interpreted bad faith under section 5(1) (Oklahoma, Alabama, and Maryland) had not applied the two-pronged test, but instead looked to their own internal law for guidance. Because there was no ‘uniform’ test for that section, the court would not adopt the test for the P[‘Uniform’]TSA.
Even so, the court applied the two-prong test to the Downeys’ counterclaim, because apparently it made no difference. The Kraffts could not have in good faith believed, in light of the trial court’s prior injunction-denial order, that their PUTSA claims had any merit. The court sent the case back to the trial court to determine the appropriate fee award.
Appellate Judge Strassburger dissented. He wrote that under the appropriate standard of review, which requires in part that the appellate court give significant deference to the trial court’s first-hand observations of the party’s conduct and credibility, the appellate court should have upheld the denial of PUTSA Section 5(1) attorneys’ fees. The trial judge was in the best position to determine the Kraffts’ subjective intent regarding their PUTSA claim, and just because they lost their preliminary injunction motion early in the case did not necessarily mean they would lose on their PUTSA claim at trial. Indeed, the Krafft’s succeeded at trial on their breach of contract claim, so the trial court’s finding that the PUTSA claim was not brought in bad faith, Judge Strassburger wrote, did not contradict the evidence so much so as to require the appellate court’s reversal.
What this means. The majority opinion did not resolve anything. It extensively examined the two-pronged test, refused to adopt it, but nevertheless applied it. Perhaps the Kraffts will ask the Pennsylvania Supreme Court to review. Or maybe they will settle the case and walk away from their verdict. We will keep an eye out, and update you with any useful developments.
Last year, Sergey Aleynikov, a computer programmer, beat federal charges of trade secret theft under the Economic Espionage Act. Although Aleynikov was initially convicted, the Second Circuit Court of Appeals overturned his conviction, finding that the trade secrets relating to the source code Aleynikov had taken were not related to a product “produced for. . . interstate or foreign commerce,” and thus, were not entitled to protection under the Act. See John Marsh’s excellent blog post for additional information on the Second Circuit case.
In response, Congress passed the Trade Secrets Clarification Act, which expands the original Economic Espionage Act to include a trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce.” The change was intended to prevent results like the Second Circuit’s decision in Aleynikov.
Although his federal case is now completed, Aleynikov is now facing a second prosecution by Manhattan District Attorney Cyrus Vance. In New York state court on Friday January 18, 2013, Aleynikov reportedly told Judge Ronald A. Zweibel that the District Attorney was “trying to convict him of stealing the bank’s high-frequency trading computer code only because federal prosecutors couldn’t get him. Aleynikov’s lawyer, Kevin Marino, reportedly explained that the prosecution was “inhuman,” and that state prosecutors had simply regurgitated prior arguments from the federal prosecution, forcing Aleynikov to fight a “many-headed Hydra.” Marino reportedly expressed frustration with the case, arguing it amounted to double jeopardy, and that Aleynikov was unlikely to serve any time even if he were convicted, since he’d already spent a year in prison following the federal case.
According to Marino, the statutes Aleynikov is being prosecuted under don’t even apply to him. Marino alleges Aleynikov was authorized to access the computers, and therefore, his use was not unlawful. Assistant Disstrict Attorney Joanne Li reportedly believes otherwise: “the misappropriation statutes cover exactly the type of wrongdoing Aleynikov is accused of.” According to Li, the fact that Aleynikov was given access to the algorithm “didn’t give him a right to copy and transfer this data to his own benefit. Furthermore, the state criminalizes behavior like this as a deterrent, and as such, there is an interest in pursuing that objective through prosecution.”
Marino also reportedly argued that the state case lacked any real purpose: as he indicated that Aleynikov is already penniless and homeless, and since he was released from jail he has had to resort to living on friend’s couches. According to Marino, the federal trial ended Aleynikov’s marriage, and Aleynikov is facing civil litigation with former employer. Marino further argued that the case should be dismissed in the interest of justice. Assistant District Attorney Li reportedly disagreed, arguing that the “interest of justice” exception did not apply to Aleynikov, who acted willfully and knowingly.
To alleviate his financial losses, Aleynikov sued his former employer in New Jersey federal district court in September 2012, arguing the company should pay the fees, which are now close to $2.5 million, which Aleyniko has spent defending himself in the two prosecutions. In the complaint, Aleynikov pleads that he had exhausted his own financial resources, and should be entitled to “indemnification for the reasonable fees and expenses incurred in his defense,” as he allegedly was still an officer of the company at the time of the trial. On December 14, 2012, the court denied Aleynikov’s motion for summary judgment and motion for a preliminary injunction to require the company to pay his legal fees, finding that there was insufficient evidence on the record at the time of the filing to support either conclusion. Similarly, the court denied the company’s motion for summary judgment and motion to dismiss for the same reasons.
Both the indemnification case and the state criminal case continue to be litigated, and we will continue to keep you apprised of future developments. Similarly, Judge Zweibel is expected to rule on Aleynikov’s motion to dismiss based on double jeopardy within the next month.
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?
Recently, state legislatures in both Idaho and New Hampshire have proposed significant legislation relating to trade secret and non-compete agreements. Each of these bills has the potential to significantly impact employers and their hiring processes.
In the Idaho state senate, a bill was recently introduced to amend the Idaho Trade Secrets Act. The proposed bill clarifies that trade secret misappropriation requires acquisition, disclosure, use or physical retention of the information. As a result, memorization of a trade secret does not qualify as misappropriation. Whether trade secrets can be misappropriated via memory is very much an undecided issue, and there is much disagreement nationally. In Massachusetts, for example, some courts have found that a person, can, in fact, be held liable for misappropriation by memory, while others have found the exact opposite. As a result, this issue is likely to remain a contested topic throughout the United States.
In addition to requiring physical possession for misappropriation, the bill would also allow the prevailing party to recover reasonable attorney’s fees. Finally, the bill makes anyone acting in concert with a misappropriator jointly and severally liable for misappropriation if they turn a blind eye to the misappropriation.
In New Hampshire, the House recently considered a bill requiring employers to disclose any non-compete and non-piracy agreements before hiring an individual. If this bill were to pass, any contract which does not comply with it would be void and unenforceable. On March 7, the House recommended that the bill be passed, but the vote has yet to occur. Such a policy would ensure that employees are fully aware of their future rights before accepting a new position.
We will continue to keep you apprised of relevant future updates in state trade secret and non-compete laws.
Mattel recently appealed a $310 million award for its alleged misappropriation of MGA’s trade secrets and MGA’s attorney’s fees and costs in defense of Mattel’s copyright claim. In its opening brief, Mattel requests the Ninth Circuit to vacate or reverse the award on grounds that MGA’s trade secret counterclaim was untimely and barred by the statute of limitations. Mattel also requests that the Court reverse or vacate the trade secret damages award on grounds of insufficient evidence, and reverse or vacate the attorneys’ fees and costs award on grounds that Mattel’s pursuit of its copyright claim was objectively reasonable.
Statute of Limitations
The statute of limitations for trade secret misappropriation under the California Uniform Trade Secret Act (Cal. Civ. Code § 3426.7) is three years after the plaintiff discovers, or should have discovered, the misappropriation.
MGA filed a trade secret counterclaim against Mattel in August 2010, on grounds that Mattel allegedly stole trade secret information about upcoming Bratz Doll lines during toy fairs. Mattel alleged that the statute of limitations accrued in 2004, when MGA had reason to suspect the alleged misappropriation after it hired two Mattel employees that were aware of Mattel’s alleged “toy fair conduct.” Thus, Mattel argues that more than three years had passed and MGA’s trade secret counterclaim was untimely and barred.
In addition, Mattel argues that the district court erred when it found that MGA’s trade secret counterclaim compulsory and related back to Mattel’s own trade secret claim in 2006, because the two sets of claims involved different trade secrets that were allegedly stolen at different places and times; by different actors; and through different means.
Insufficient Evidence for Judgment of Trade Secret Liability and Damages
Mattel also requests that the Ninth Circuit reverse or vacate the judgment of Mattel’s trade secret liability. Mattel writes in its brief that the “evidence was insufficient to support the jury’s verdict that each of the 26 products on which it found liability and damages was a trade secret.” Mattel acknowledges that MGA provided evidence that MGA generally made reasonable efforts to protect its trade secrets at toy fairs by protecting information from the press, locking products in separate rooms, and requesting visitors to sign Non-Disclosure Agreements. Mattel argued that the evidence, however, failed to demonstrate that MGA took these reasonable efforts of protection for each of the 26 products the jury found liability and damages.
In addition, Mattel argues that the evidence is insufficient to support the $85 million for trade secret damages because there is no evidence of identical uniform damages of $3.4 million for each of the 26 products. Mattel requests that the Court vacate or remand the trade secret damages award for a new trial limited to determining damages on these 26 trade secrets.
Attorneys’ Fees and Costs
Finally, Mattel argues that the $137.2 million in attorneys’ fees and costs awarded to MGA under the Copyright Act for MGA’s defense against Mattel’s copyright claims should be reversed or vacated. Section 505 of the Copyright Act grants courts the discretion to award reasonable attorney’s fees and costs to a prevailing party. The 9th Circuit requires that courts shifting copyright fees and costs to consider the objective unreasonableness, frivolousness, motivation and need for deterrence. Mattel argues that its copyright litigation against MGA was objectively reasonable considering Mattel prevailed before the first, jury, obtained substantial relief, and had the Appellate Court remand the case for a new trial.
MGA has yet to file its response brief. This appeal merits attention and we will keep you updated.