Thursday, July 19, 2012

The Bad Edition: On Bad Faith and Bad Laws (Courtesy of Judge Posner)

Describing the parameters of bad faith should be no more complicated than Justice Potter's famous test for identifying pornography: you know it when you see it.

Trade secrets laws generally allow for a prevailing defendant to recover its attorneys' fees if a claim of misappropriation is made in bad faith. The uniform act contains no definition of what that means, but really it's no more complicated than the "exceptionality" standard used to determine fee-shifting for patent and trademark infringement. If a plaintiff uses the litigation process to heap litigation costs on a competitor (and not to win), then this is pure abuse of process - the normative equivalent of bad faith.

The trade secrets provision hasn't been the subject of much litigation outside California, and the interpretations of bad faith generally hinge on some showing of objective speciousness in the claim. Many courts also look for some indicators of the plaintiff's subjective intent to harass or abuse the litigation process.

A recent California case demonstrates that the concept of bad faith has to be flexible and necessarily looks at a variety of circumstances outside the initial pleadings. In SASCO v. Rosendin Electric, 2012 Cal. App. LEXIS 797 (Cal. Ct. App. 4th Dist. 2012), the Court of Appeal affirmed an award of nearly $500,000 in attorneys' fees for the defendants who prevailed on a trade secrets claim arising out of "off-the-shelf"software. (They prevailed, actually, because SASCO voluntarily got rid of the case before entry of summary judgment.)

The court discussed the objective/subjective test, noting fees are proper if a plaintiff either brings or maintains a claim in bad faith. The court rejected the defense argument that it was appropriate to look to California's Rule 11 equivalent in determining the speciousness of the claim. Rejecting this argument, the court stated: " simply makes no sense as a matter of statutory interpretation to insert a general pleading abuse statute applicable to attorneys or others signing pleadings and motions...into a ...section limited to the recovery of attorney fees and costs in trade secret misappropriation claims."

This malleable use of bad faith dovetails nicely with the abuse of process, or exceptionality, test used by some courts - notably the Seventh Circuit - in other intellectual property litigation. Both the Patent Act (Section 285) and the Lanham Act (Section 1117) allow for fees in "exceptional" cases. Equating exceptional cases with those containing "abuse of process" elements is pragmatic and recognizes the realities of competitive litigation, much of which is driven for retributive - not remedial - purposes. So exceptionality equals "abuse of process" equals "bad faith."

Speaking of might have heard Apple and Motorola's dust-up over smart phone technology ended with a whimper, not a bang. Judge Posner presided over that trial, sitting as a district court judge, and ruled that neither damages nor injunctive relief was appropriate. The ruling is certain to be appealed. What's interesting, though, is Judge Posner's general views on the problems with our patent laws and how they can be fixed. His op-ed article from The Atlantic describes why there are too many patents and how the current system is broken.

Firms generally make decisions whether to patent or keep valuable information secret. Those are mutually exclusive ideas. If Posner's views on reform are implemented, it is likely that many firms would be encouraged to exploit ideas or inventions through secrecy rather than a government-sanctioned monopoly. I don't necessarily think that's a good thing, since trade secrets are not objectively verifiable and are often overused to cannibalize general knowledge. But Posner's clearly right that the patent system is a wreck.

So we come full circle on fees. The best way to deter this overuse of the trade secret branch of intellectual property is to give some real teeth and meaning to fee-shifting. Given the sheer expense of trade secrets litigation (the Rosendin Electric case being an example), the deterrent effect of pursuing a weak claim would be quite high if fee-shifting were more than a pipe dream. Courts in California, where much of our technology innovation occurs, have taken steps in interpreting its trade secrets laws to create the proper incentives and to put trade secrets plaintiffs on notice that unsupported claims will result in a significant sanction.

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