If location is the most important word in the restaurant business, then the three most important words for a plaintiff in a trade-secret or unfair-competition practice must be theory, theory, and theory. Each legal theory must be supported by its own facts and evidence and a thorough understanding of the legal consequences of asserting and failing to succeed on a particular theory. While the right facts aligned with the right legal theory can yield judgments in the hundreds of millions of dollars, the wrong theory can have significant negative consequences.
A recent unpublished court of appeals case, Parcell Steel Co. v. Sauer (2012 Cal. App. Unpub. LEXIS 1508), illustrates one of the dangers of claims filed against former employees. Parcell designed and installed rebar for concrete construction. Three of Parcell’s long-term employees left the company and went to work for Badger State Rebar, a company owned by one of Parcell’s former employees. It seems clear that someone at Parcell was upset at this group departure. Maybe somebody was angry. Whatever the plaintiff’s emotional state or motives, Parcell sued the former employees and Badger claiming the former employees had breached their duty of loyalty while they were still employed by Parcell, stole company property, interfered with prospective business relations, and engaged in unfair competition.
Although Parcell had first alleged a misappropriation-of-trade-secrets claim, it dropped that claim early in the case, even though it continued to allege that the former Parcell employees had used Parcell’s information to issue bids competitive to Parcell. Parcell also alleged that, in the weeks and months prior to their departure from the company, the employees had failed to discharge their duties effectively. Essentially, Parcel claimed that the employees were working to injure Parcell prior to their departure. As an example, Parcell alleged that one of the employees had sold a forklift “as is” for a few thousand dollars but had spent several thousand repairing the forklift prior to sale.
The plaintiff’s focus on the breach of the duty of loyalty had important strategic and legal consequences. Employees, agents and officers of a company can be entitled to seek indemnity for legal expenses arising from alleged malfeasance in their duties as an agent, officer or employee. This section of the Corporations Code is often used by members of boards of directors who are sued by shareholders for malfeasance to recover fees incurred in the defense of those claims. These sections of the Corporations Code allow employees, officers and agents of a corporation (who have prevailed in defending a claim against them that arises from their work for the corporation) to require the corporation to reimburse them for the legal fees they incurred.
Parcell lost. The trial court awarded approximately $500,000 in attorney’s fees and costs under Corporations Code section 317 to the victorious defendants.
Here is where I detect something like irony: Had Parcell stuck with unfair-competition or trade-secret-misappropriation theories, the defendants may not have been eligible to seek an award of fees under the Corporations Code. Parcell may still have lost, but then the basis for the fee application would have been under the California Trade Secrets Act’s much higher standard for an award of attorney’s fees. (Essentially, a prevailing defendant must show that a Plaintiff filed the Trade Secret claim in “bad faith.”) Trade secret misappropriation claims do not typically result in a fee award under Corporations Code section 317. Why? In most trade secret cases the alleged misappropriation arises outside the course and scope of the employees duties. Thus, even if the defendant prevails, there is no entitlement under Corporations Code 317. Here, however, the focus on the former employee’s conduct as an employee plainly implicated the indemnity rights under the Corporations Code.
Hindsight is 20/20, and appellate court decisions do not always provide the information needed to fully understand they parties tactics and decisions. Nonetheless, plaintiff in such cases must pay great attention to the selection or rejection of three very important things; namely, theory, theory, and theory.