Introduction

Trade secret litigation can be brutal. Many times you have a company going after an ex-employee (and sometimes their new employer) for alleged theft of sales leads, confidential documents, and other proprietary information. For smaller companies, this can quickly turn into "bet the farm" litigation. One thing to note in both copyright infringement and trade secret misappropriation cases is that the prevailing party does NOT automatically become entitled to an award of attorney fees. These are left to the sound discretion of the state or federal court judge. This blog discusses attorney fees in the trade secret context under the California law ("CUTSA").

Attorney fees in trade secret cases

In many cases, a trade secret plaintiff will sue under both the state law and the federal law (called the Defend Trade Secrets Act). Here is some case law that shows what is required to recover attorney fees; it is NOT mandatory.

Moving party's burden of proof

On a motion for attorney's fees, the moving party has the burden of proof:

(1) establishing entitlement to an award,

and

(2) documenting the appropriate hours expended and hourly rates. (ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1020.)

Attorney's fees are recoverable as costs, when authorized by contract, statute, or law. (Code Civ. Proc., §1033.5, subd. (10)(A)-(C).)

Defendant Pina contends he is entitled to recover statutory fees pursuant to the California Uniform Trade Secrets Act (CUTSA). CUTSA provides that if "a claim of misappropriation is made in bad faith … the court may award reasonable attorney's fees and costs [including expert fees] to the prevailing party." See Cal. Civ. Code, § 3426.4.)

Attorney Fees under California Uniform Trade Secret Act ("CUTSA")

CUTSA "authorizes the trial court to award attorney fees as a deterrent to specious trade secret claims." (FLIR Systems, Inc. v. Parrish (2009) 174 Cal.App.4th 1270, 1275; see Gemini Aluminum Corp. v. California Custom Shapes, Inc. (2002) 95 Cal.App.4th 1249, 1261.) "Because the award is a sanction, a trial court has broad discretion in awarding fees." (FLIR Systems v. Parrish, supra, 174 Cal.App.4th at p. 1275.) See Broker Solutions v. W. Express Lending, 2022 Cal. Super. LEXIS 74451.

How to determine Bad Faith in Trade Secret litigation

The California Uniform Trade Secrets Act ("CUTSA") provides that if "a claim of misappropriation is made in bad faith … although the Legislature has not defined 'bad faith, ' courts have developed a two-prong standard:

(1) objective speciousness of the claim,

and

(2) [plaintiff's] subjective bad faith in bringing or maintaining the action, i.e., for an improper purpose." (FUR Systems, supra, 174 Cal.App.4th at p. 1275; see also Gemini Aluminum Corp., supra, 95 Cal.App.4th at p. 1262.)

I. Objective Speciousness

"Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim." A defendant moving for attorney fees under section 3426.4 is not required to conclusively prove a negative (i.e., that they did not steal [the plaintiffs] trade secrets)." (Cypress Semiconductor, supra, 236 Cal.App.4th at p. 260 [alteration in original; internal quotation marks omitted].) "[U]nder the objectively specious standard, it [i]s enough for defendants to point to the absence of evidence of misappropriation in the record." (SASCO v. Rosendin Elec, Inc. (2012) 207 Cal.App.4th 837, as modified on denial of reh'g (Aug. 7, 2012) [internal quotation marks omitted]; id. at p. 849 ["It does not matter that the evidence specifically cited by the court did not conclusively prove the absence of misappropriation"].)

A plaintiff asserting a claim for misappropriation of trade secrets under CUTSA must prove:

"(1) possession by the plaintiff of a trade secret;

(2) the defendant's misappropriation of the trade secret, meaning its wrongful acquisition, disclosure, or use;

and

(3) resulting or threatened injury to the plaintiff." (Silvaco Data Sys. v. Intel Corp., (2010) 184 Cal.App.4th 210, 220, disapproved of on other grounds by Kwikset Corp. v. Super. Ct. (2011)51 Cal.4th310.)

Trade secret' means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use;

and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." (Civ. Code, § 3426.1(d).).

Misappropriation of a trade secret is its wrongful acquisition, disclosure, or use. (Silvaco Data Sys., supra, 184 Cal.App.4th at p. 220.) Plaintiffs may rely on circumstantial evidence to prove misappropriation claims. (Ajaxo, Inc. v. E*Trade Group, Inc. (2005) 135 Cal.App.4th 21, 50.) By definition, circumstantial evidence, as opposed to direct evidence, "'is testimony not based on actual personal knowledge or observation of the facts in controversy, but of other facts from which deductions are drawn, showing indirectly the facts sought to be proved. [Citation.]'"

Court's analysis

Here, Americor submits evidence to show it possessed a trade secret. Americor identified 16 discrete categories of trade secrets. Americor's trade secret information includes, among other things, Americor's proprietary guides, flow and business methods, parameters used within Americor's system, business map, Americor's specific creditor monitoring systems, and internal proprietary CRM (client relationship management tool). As this court ruled previously, these 16 items of trade secrets are adequate and sufficient under Section 2019.210. (ROA 712 [Order approving and adopting discovery referee report], 714 [Discov. Referee Report].)

Americor also shows the trade secrets derive independent economic value and that Americor had "developed completely brand-new processes in the system." Furthermore, at least one competitor was interested in duplicating Americor's internal proprietary technology. (See id., at 224:13-20, 225:10-226:3.) Americor also submits evidence to show those trade secrets are the subject of reasonable efforts to maintain its secrecy. Specifically, Smith signed an employment agreement that sets forth the employee's obligation "to keep all Confidential Information absolutely confidential and protect its release from the public" and "not to divulge, reveal, report or use, for any purpose, any of the Confidential Information. …" In addition, the employee handbook provides that "Confidential information is considered property of the company" and that employees "may not disclose any proprietary information to anyone outside our company…. Disclosure of proprietary information is a strict violation of company policy and will result in disciplinary action up to and dismissal."

Mere possession of trade secret documents by a departing employee like Smith does not provide for a misappropriation claim. (FUR Systems, Inc., supra, 174 Cal.App.4th at p. 1279 [noting the inevitable disclosure doctrine is not the law in California].) "A 'threatened misappropriation' means a threat by defendant to misuse trade secrets, manifested by words or conduct, where the evidence indicates imminent misuse. (Ibid [citing Central Valley General Hosp. v. Smith (2008) 162 Cal.App.4th 501, 527 (finding imminent threat of misuse based on defendant's possession of trade secrets and prior misuse)].)

It is undisputed that Smith emailed confidential company information to his personal email account. Plaintiff's explanation that he simply emailed them to work from home is not credible given the evidence that some of the emailed information was not part of Smith's department, and Smith would have no reason to email these documents to his personal email account.

Here, Americor submits evidence that Smith reached out to the Americor CTO seeking to build competing technology for a competitor. Recruiting an old colleague, standing alone, does not show any threatened misuse of confidential information. However, when considered together with Smith's possessing trade secrets relating to Americor's internal systems, this supports a reasonable inference that Smith was trying to capitalize on those trade secrets to provide his new employer a competitive advantage over Americor.

Based on the above, the court finds Americor's CUTSA claim not to be objectively specious.

II. Subjective Bad Faith

Cal. Civ. Code § 3426.4, authorizes attorneys' fees when "a claim of misappropriation is made in bad faith." California courts have held that bad faith "requires objective speciousness of the plaintiff's claim, as opposed to frivolousness, and its subjective bad faith in bringing or maintaining the claim." Gemini Aluminum Corp v. Cal. Custom Shapes, Inc., 95 Cal. App. 4th 1249, 116 Cal. Rptr. 2d 358, 368 (Ct. App. 2002). A "specious" action "may superficially appear to have merit," id., so attorneys' fees may be proper even if the claim is not frivolous. See Direct Techs., LLC v. Elec. Arts, Inc. (9th Cir. 2016) 836 F.3d 1059, 1071.

An award of attorney fees for bad faith constitutes a sanction ( Computer Prepared Accounts, Inc. v. Katz, (1991) 235 Cal. App. 3d 428, 431 [286 Cal. Rptr. 556]), and the trial court has broad discretion in ruling on sanctions motions. ( Tenderloin Housing Clinic, Inc. v. Sparks (1992) 8 Cal. App. 4th 299, 304 [10 Cal. Rptr. 2d 371].) "Assuming some evidence exists in support of the factual findings, the trial court's exercise of discretion will not be disturbed unless it exceeds the bounds of reason. In reviewing the facts which led the trial court to impose sanctions, we must accept the version thereof which supports the trial court's determination, and must indulge in the inferences which favor its findings. [Citations.]" ( West Coast Development v. Reed (1992) 2 Cal. App. 4th 693, 698 [3 Cal. Rptr. 2d 790].)

We cannot say the court abused its discretion. The UTSA defines a trade secret as information that "(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [P] (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." (§ 3426.1, subd. (d), italics added.) When information has no independent economic value, a claim for misappropriation lacks merit. ( GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc., supra, 83 Cal. App. 4th, at p. 429 [confidential salary information not a trade secret because it had no independent economic value].)

Gemini alleged that CCS misappropriated the identity of Taskmaster and die drawings needed for the extrusion of aluminum parts for the workbench. Customer lists and related information may constitute protectable trade secrets. (See, e.g., Morlife, Inc. v. Perry (1997) 56 Cal. App. 4th 1514, 1521 [66 Cal. Rptr. 2d 731]; ABBA Rubber Co v. Seaquist (1991) 235 Cal. App. 3d 1, 19 [286 Cal. Rptr. 518].) However, Gemini filed its complaint for misappropriation and related counts in December 1996, long after the identity of Taskmaster and die drawings for the workbench parts arguably held any economic value, actual or potential, to Gemini, CCS or any other competitor. By September 1995 Taskmaster was $ 326,219.21 in arrears to Gemini, and by the summer of 1996 it was $ 18,896.76 in arrears to CCS. Further, in September 1996 Taskmaster filed a bankruptcy proceeding. Gemini's case was objectively specious, if not frivolous, from its inception.

The timing of Gemini's action also raises an inference of subjective bad faith. CA. Good faith, or its absence, involves a factual inquiry into the plaintiff's subjective state of mind [citations]: Did he or she believe the action was valid? What was his or her intent or purpose in pursuing it? A subjective state of mind will rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence." ( Knight v. City of Capitola (1992) 4 Cal. App. 4th 918, 932 [6 Cal. Rptr. 2d 874].)

'[B]ad faith' means simply that the action or tactic is being pursued for an improper motive. Thus, if the court determines that a party had acted with the intention of causing unnecessary delay, or for the sole purpose of harassing the opposing side, the improper motive has been found, and the court's inquiry need go no further." ( Summers v. City of Cathedral City (1990) 225 Cal. App. 3d 1047, 1072 [275 Cal. Rptr. 594].). (Gemini Aluminum Corp. v. Cal. Custom Shapes (2002) 95 Cal.App.4th 1249, 1262-1263 [116 Cal.Rptr.2d 358].)

Conclusion

Trade secret cases can often impose significant burdens, especially where a ex-employee leaves to a competitors business. Hi tech cases in California, and silicon valley are not uncommon. At the outset of every case, attorneys need to be thinking about how they can build their case for attorney fees. This can help out as a negotiation tool if you can clearly document that attorney fee sanctions may well be awarded. Have your evidence. Get evidence through depositions and discovery and be prepared to make the case when the time comes. It is not an easy standard to meet to get attorney fees awarded, but hopefully this gives you some things to be focusing on.