Monday, December 7, 2015

Is the Majority Test for Determining Bad Faith in Trade Secrets Claims Still Good Law?

Recently, I had the opportunity to speak at the American Intellectual Property Law Association's annual Trade Secrets Summit. My topic (along with co-presenter William L. Schaller) was "Bad Faith in Trade Secrets Litigation." I know the topic well, having represented many defendants in specious trade secrets claims, including the prevailing defendants in Tradesman Int'l v. Black, 724 F.3d 1004 (7th Cir. 2013).

Although the Uniform Trade Secrets Act does not define "bad faith," its commentary in Section 4 does indicate that courts should look to the standards of the Patent Act, 35 U.S.C. Sec. 285, That section enables a court to award attorneys' fees to a prevailing party in an exceptional case. Therefore, the UTSA's commentary seems to equate "bad faith" with "exceptionality." (As a side-note, not all states that have adopted the UTSA contain a bad-faith provision on par with Section 4. At last count, four states lack a discretionary fee-shifting provision.)

The case law concerning a Section 4 claim of bad faith is relatively narrow, with few courts outside California formulating much in the way of a test. California, for its part, has long adopted a two-part "objective/subjective" test, which asks:

1. Whether the trade secrets claim is "objectively specious." This means that the plaintiff must lack proof as to one of the essential elements of the case.

2. Whether the facts support a finding of "subjective misconduct." Here, courts examine evidence of harassment, delay, and improper motive.

Lawyers who have experience with bad-faith claims often assume that this California test is generally applicable. However, a Supreme Court case from 2014 may cause attorneys to reconsider if they're examining claims of bad-faith under the appropriate framework.

Pivoting back to the Patent Act, the Court in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), clarified the standard of "exceptionality" under Section 285. It stated:

"an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances."

The standard is remarkably flexible, endorsing a large grant of discretion to a trial judge to consider whether fee-shifting is appropriate. Given the fluid "totality of the circumstances" test, virtually nothing is off-limits in establishing bad faith.

At the Trade Secrets Summit, Bill Schaller and I discussed the importance of "trigger facts" to avert a bad faith claim. Those trigger facts may insulate a plaintiff from fee-shifting, even if the case turns out poorly. Among the most common trigger facts are:

1. Some suspicious computer activity, such as mass downloads or improper use of a personal storage device.

2. Physical retention of corporate records, which could reflect company secrets.

3. Dishonest conduct at the time of departure or failure to participate in an exit interview.

4. The failure of counsel to alert the plaintiff as to erroneous facts assumed by the plaintiff in filing the case (here, most claims of misappropriation must proceed based on inference).

It is possible the Octane Fitness framework is no different than the California test, for the bad-faith determination is inherently fact-specific. However, for defendants, it seems quite clear that they have enormous flexibility in arguing a claim for fees based on the case's inherent weakness, even apart from any evidence that reflects evil motive. That is the way it should be.

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