There are good, legitimate reasons for filing a trade secret and unfair competition case. The protection of trade secrets and proprietary information and protection against unfair conduct by competitors are just a few. There are also business reasons for bringing such a claim, including burdening a competitor or a startup competitor with the cost of defending such a claim. When those business reasons are unsupported by strong legal and factual support for the claim and an otherwise legitimate rationale for bringing suit, a trade secret plaintiff who is motivated only by a desire to burden a competitor may face steep sanction.
In Sasco v. Rosendin Electric, Inc., the Fourth Appellate District Court of Appeal upheld a trial court’s award of “bad faith” attorney’s fees against a trade secrets plaintiff under section 3426.4 of the California Uniform Trade Secrets Act. The award was just under $500,000. Sasco and Rosendin are both licensed electrical contractors in California. The individual defendants in the case worked for Sasco in senior management positions until late 2006. All of them had signed nondisclosure agreements with Sasco. Upon resignation, the individual defendants had joined Rosendin. Prior to their resignations, one of the individual defendants had been responsible for a Sasco bid on a large construction project. After the individual defendants had resigned from Sasco, their new employer won the bid. On information and belief, Sasco alleged that the individual defendants had utilized their knowledge of Sasco’s confidential bid on the project to undermine the bid and secure the job for their new employer. Sasco also alleged that Sasco’s bid procedures, estimating system and other information had been surreptitiously accessed, copied and misappropriated by the defendants. Sasco filed suit claiming misappropriation of trade secrets, intentional interference with prospective economic advantage, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing.
At the outset of discovery, Sasco identified (under Code of Civil Procedure section 2019.210), its proprietary computer program which deals with job details as the trade secret that was at issue in the case. The discovery was hotly contested in the case and multiple motions to compel were brought. The Court of Appeal noted that the trial court had had a “ring side seat” on the disputes between the parties about discovery and could appropriately use that information in determining a party’s subjective bad faith. Defendants filed a motion for summary judgment.
Sasco obtained a continuance of the summary judgment hearing to conduct additional discovery. Then, Sasco voluntarily dismissed the action without having filed an opposition to the motion for summary judgment.
Defendants then moved for attorney’s fees and costs pursuant to section 3426.4. Defendants argued they were entitled to fees because: (1) there was no trade secret (the computer program identified in Sasco’s 2019.210 statement was “off the shelf”; (2) no evidence of misappropriation of any trade secret; and (3) the actual misfile for the improper purpose of harassing a business competitor and ex-employees.
The Court of Appeal closely scrutinized the evidence that had been developed in the case. It reviewed deposition testimony, the procedural history of the case and the conclusions of the trial court. Tellingly, the Court found Sasco at fault for suing defendants for misappropriation of trade secrets based merely on the suspicion that such misappropriation had occurred. Even assuming that the computer program was a trade secret, the Court concluded that there was no evidence of misappropriation. The court found that Sasco had failed to conduct a thorough investigation prior to filing suit and concluded that it acted merely on the fact that former Sasco employees had gone to work for Rosendin and then Rosendin had obtained a bid. In sum, the Court concluded those facts were insufficient to support a “good faith” claim.
It is something of a truism that in trade secrets and unfair competition cases “injury is not enough”. That slogan is based on the fact that both unfair and fair competition cause injury. In a free marketplace, there are winners and losers. Losers are damaged by their loss. The fact that a competitor has won a particular market encounter, does not, by itself, evidence wrongful conduct.
The Court of Appeal upheld the trial court’s decision, finding it had applied the correct analysis under the California Uniform Trade Secrets Act. Plaintiff’s in trade secret cases should consider not just their factual basis for filing suit (to ensure an adequate factual foundation for the filing of the cases exists) but also closely scrutinized their conduct of the case. What a plaintiff says in their 2019.210 statement can have important consequences throughout the remainder of the case.