February 22, 2002
Last week, the California Court of Appeal issued an important decision regarding the standard for recovering attorney's fees for "bad faith" trade secret misappropriation claims under California's enactment of the Uniform Trade Secrets Act, which also has been adopted in 42 other states and the District of Columbia. The California decision may be persuasive in other states, as it is only the fourth reported case in the country addressing this particular issue.
The UTSA, of course, is an important tool for protecting many business secrets that either do not qualify for traditional forms of intellectual property protection such as patent or copyright, or the owner believes are better preserved outside the traditional legal regimes. However, the act also can become an instrument of harassment, such as when less than meritorious claims are brought against departing employees to discourage them from joining a competitor.
One of the safeguards against such harassment suits is the UTSA's attorney's fees provision, which authorizes courts to award attorney's fees to a prevailing party whenever a misappropriation claim is made in "bad faith." This authorization for fees is significant, because otherwise fees generally are not recoverable unless the claim is shown to be "frivolous," a difficult standard to meet. To prove frivolousness, a prevailing defendant must show that any reasonable attorney would agree the plaintiff's claim is totally and completely without merit on its face.
In Gemini Aluminum Corp. v. California Custom Shapes, Inc. (Feb. 5, 2002) 2002 Cal. App. LEXIS 1241 (certified for publication), the California Court of Appeal held that a "bad faith" claim of misappropriation is one that is: (a) objectively "specious," and (b) pursued for an improper motive. A claim is objectively specious, the court ruled, if it superficially has merit but in reality is devoid of substance. The opinion suggests that an absence of evidence to support a key element of a misappropriation claim should be sufficient to establish the "specious" requirement.
In Gemini, a contract manufacturer, Gemini, sued its subcontractor, CCS, for allegedly misappropriating the name of Gemini's customer, Taskmaster (a designer and seller of workbenches), and certain technical drawings provided to Gemini by Taskmaster, for the purpose of obtaining Taskmaster's business directly. At the time CCS acquired these alleged trade secrets, Task-master was in financial ruin and arrears to Gemini by more than $320,000, facts that Gemini knew but CCS did not. CCS ultimately did obtain some business directly from Taskmaster, but the total volume was $25,000, for which CCS was paid only $6,100. By the time Gemini filed its trade secrets claim, Taskmaster had initiated liquidation proceedings under Chapter 7 of the Bankruptcy Code and apparently ceased operations.
The decision makes clear that the appeals court believed the value to Gemini and CCS of Taskmaster's identity and technical drawings at the time CCS acquired them was virtually nil, because of Taskmaster's failing financial condition and subsequent collapse. This was critical, because a secret cannot qualify for trade secret protection unless the plaintiff proves the secret has "independent economic value" from not being known.
Early on in the case, CCS pointed out the absence of economic value to Gemini, but Gemini proceeded to trial anyway, where it lost. The jury's unanimous verdict, reached after deliberating for an hour, included a special advisory determination that Gemini had pursued its misappropriation claim in "bad faith." CCS then moved to recover its attorney's fees under the UTSA, which the trial court granted in the amount of $160,000.
The California Court of Appeal concluded that Gemini's misappropriation claim was objectively "specious." Although Gemini's claim for theft of the customer list and the technical drawings appeared to have merit, the court concluded that a probe beneath the surface revealed the absence of economic value and, therefore, merit.
The appellate court also upheld the trial court's finding that Gemini pursued the trade secret claim for improper motives. Recognizing that direct evidence of a party's state of mind is rarely available, the court held that motives can be inferred from circumstantial evidence. The appeals court concluded that Gemini could not possibly have believed the alleged trade secrets had any economic value by the time the lawsuit was filed, because Gemini already knew of Taskmaster's collapse. The court also found significant the response by Gemini's lawyers after being told early in the case that the alleged trade secrets had no economic value: "[CCS] did not have a clue about [Gemini's] case." Finally, the court suggested that testimony by Gemini's principal that CCS's principal was "snaky," and that the principals of CCS and Taskmaster were "two snakes in a paper sack," tended to show that the misappropriation claim was pursued for reasons other than vindicating genuine trade secret rights.
Upshot: After Gemini, the defendants in trade secrets cases have a strong incentive to identify fatal defects in the plaintiffs' claims as early as possible, particularly where there is an obvious absence of evidence to support a key claim element. The missing element may persuade the plaintiff to drop the claim and, if not, may help establish the claim's speciousness later. A letter to opposing counsel pointing out the defect also may help establish the plaintiff's improper motive, particularly if no evidence is subsequently developed.
Of course, just because a trade secrets claim is lost does not mean that it was brought in "bad faith." Even under Gemini, a losing party may be able to escape a finding of speciousness by presenting at least one credible fact in support of each element of its claim. Thus, the Gemini case will likely have the greatest impact on the truly egregious cases where a trade secret plaintiff persists despite the absence of key supporting evidence or the realistic prospect of finding any.
For more information regarding the Gemini decision or trade secrets and unfair competition law in general, please contact:
Robert A. Weikert
415.369.7350
raweikert@thelenreid.com
Charles M. Dyke
415.369.7206
cmdyke@thelenreid.com
Kenneth L. Nissly
408.282.1802
kennissly@thelenreid.com
David L. Aronoff
213.229.5678
daronoff@thelenreid.com
©2002 By Thelen LLP. This legal update is published as an information service to clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. The attorneys listed above, or your Thelen attorney contact, would be happy to discuss in greater detail the information in this article and its application to your specific situation. We welcome your comments and suggestions.
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