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.

Weintraub Tobin attorneys Chuck Post and Paul Gaspari invite you to attend the Association of Asian American Bankers seminar “The Moving Target – Recent Changes in California Employment Law” July 17th at America California Bank.

The labor and employment attorneys will provide a brief overview of the complexities of laws facing employers and discuss important case law developments.  Topics include:  

  • Why does the California Supreme Court decision in Brinker matter?
  • Who is entitled to what absence (PDL, FMLA,CFRA, USERRA)?
  • 1099 or W-2: Why should you care? 

Topic: 
The Moving Target – Recent Changes in California Employment Law

Date: 
July 17, 2012

Time: 
5:30 p.m. – 7:30 p.m.

Place:  
America California Bank, 417 Montgomery Street, San Francisco, CA 94104

Speakers:   
Paul E. Gaspari
Charles L. Post
Weintraub Tobin

Registration & Fees (beverages and light snacks are complimentary with registration):

a) Current AAAB members – FREE admission. Please send us an e-mail at events@aaabankers.org with your name and contact phone number to register for the event.

b) Non-Members – $15. Please follow this link to register and attend the event at a $15 non-member rate:  

Register & Pay Online 

c) SPECIAL: Become a member of AAAB and receive 50% off $30 annual AAAB membership fee (valid through 12/31/2012) and attend the event for only $5 (attend all future event except Annual Dinner – FREE). Please follow this link to register and pay for a discounted membership/event fee of $20: Register & Pay Online

By:       Chelcey E. Lieber

Question:  An employee is out on FMLA leave to care for her newborn baby.  Before her leave ends, she notifies her employer that she actually does not intend to return to work.  Does the employee still have any restoration rights?  Can the employer recover any health care premiums they paid during the employee’s FMLA leave?

Continue Reading FAQ: What Should An Employer Do When an Employee on FMLA Leave Says They Will Not be Returning to Work?

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.