United States: Speculation Is Not Enough To Support Trade Secret Misappropriation Claims In California

Executive Summary:  The California Court of Appeal recently affirmed an award of over $400,000 in attorneys' fees in favor of a group of ex-employees in a trade secret misappropriation lawsuit filed by their former employer, finding that the lawsuit was filed in bad faith.  This decision highlights the importance of considering carefully whether to bring a misappropriation claim where there is little or no evidence of actual misappropriation.  See SASCO v. Rosendin Electric, Inc.

California's prohibition on noncompete agreements often frustrates employers who are unable to use such agreements to stop employees from joining the ranks of a competitor.  As an alternative, an employer who suspects an ex-employee is disclosing confidential company secrets to a competitor may be tempted to file a trade secret misappropriation claim.  However, the recent ruling in Rosendin demonstrates the importance of having evidence to support the employer's suspicion before filing such a lawsuit.

Under California law, misappropriation of a trade secret includes acquiring trade secret information through "improper means" or using the trade secrets of another that were obtained "from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use."  See Cal. Civ. Code §3426.1(b).  Courts may award attorneys' fees if a trade secret misappropriation claim is made in bad faith.  Although the attorneys' fee statute does not define "bad faith," courts have interpreted it to include subjective bad faith in bringing or maintaining the claim along with "objective speciousness of the plaintiff's claim."1  "Objective speciousness" is defined as an action that superficially appears to have merit but there is a complete lack of evidence to support the claim.   

In this case, SASCO sued three of its former managers and their new employer, Rosendin Electric, Inc. (collectively "Rosendin"), all of whom are licensed electrical contractors, claiming the ex-employees were the reason SASCO lost out on a bid for a multi-million dollar project.  SASCO's lawsuit alleged that its ex-employees stole trade secret information (including SASCO's unique estimating and job cost systems) and gave that information to Rosendin.

After several discovery battles, Rosendin filed a motion for summary judgment, but SASCO voluntarily dismissed the action instead of responding to the motion.  Roesendin then sought an award of attorneys' fees against SASCO, arguing that SASCO brought the claim in bad faith.  Rosendin supported its motion with the deposition testimony of SASCO's chief executive officer who admitted that he did not have any actual evidence that the ex-employees took any documents.  Rosendin also presented the ex-employees' declarations stating that they did not steal any of SASCO's trade secrets and a declaration from a manager on the project stating that Rosendin got the bid because it was the lowest eligible bidder.

The trial court granted Rosendin's motion, finding no evidence of misappropriation and awarding $484,943.46 in attorneys' fees to Rosendin.  The court faulted SASCO for not conducting a thorough investigation prior to filing the lawsuit and for continuing to prosecute the lawsuit without evidence to support its allegations.

SASCO appealed the trial court's finding of bad faith, arguing that the "objective speciousness" standard applied by the trial court improperly required SASCO to have actual evidence of misappropriation to avoid a bad faith determination.  The Court of Appeals rejected this argument, holding that an objective standard is necessary to deter parties from bringing misappropriation claims that have no merit.  The court also held that Rosendin did not have to prove that it did not engage in wrongful conduct, which would require it to "prove a negative."  Instead, the court found that Rosendin's evidence demonstrated that SASCO lacked evidentiary support for the misappropriation claim and held that SASCO could not bring a lawsuit based on pure speculation.

Employers' Bottom Line

The decision in Rosendin illustrates the difference between run-of-the-mill employment lawsuits where a plaintiff faces virtually no consequences for prosecuting a meritless claim and trade secret misappropriation lawsuits in which the plaintiff must have some evidence supporting its allegations or risk being subject to a significant attorneys' fee award.  Quite simply, in a misappropriation of trade secret lawsuit, speculation of trade secret theft is not enough.

To avoid the potentially adverse consequences of filing a lawsuit based on suspicion alone, employers should take steps to protect themselves from employee data theft before it happens.  These steps include identifying the information that is considered a trade secret, implementing non-disclosure agreements, securing the physical environment in which trade secrets are stored, managing and securing access to the trade secrets, and implementing protocols for departing employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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