Monday, September 12, 2016

Illinois Appellate Court Announces a "Test" to Evaluate Bad Faith in Trade Secrets Claims

In Conxall Corp. v. iCONN Systems, LLC, the First District Appellate Court of Illinois set forth what only loosely can be described as a "test" for determining when a party maintains an action for trade secrets misappropriation in bad faith.

If my frustration is not yet overt, let me be overt: I'm frustrated.

Our appellate court has struggled mightily with business and competition issues in recent years, notably with an unnecessary fissure among courts regarding whether an employer must show a protectable interest to support a non-compete (answered yes) and then again regarding whether employment itself is sufficient consideration for an at-will employee's non-compete (answered no, but yes if employment lasts two years, with almost all federal courts just categorically saying yes, but with some saying no).

Conxall addresses a question no reported Illinois descision has had to confront yet: how do you determine bad faith in trade secrets claims? The decision is a jumbled mess of three opinions, with the concurrence actually producing the legal standard to answer that question (to get there, you must read the dissent, which agrees with the concurrence in part).

In my judgment, there really are only two possible tests for determining bad faith. One is the Octane Fitness test, which comes from a Supreme Court patent case a few years ago outlining the fee-shifting standard under Section 285 of the Patent Act. Why pertinent? Since the Uniform Trade Secrets Act's fee-shifting clause stems from the Patent Act (per the commissioners' comments), it only makes sense to look to Octane Fitness for guidance. That case holds that fees are recoverable if the case "stands out from others with respect to the substantive strength of the litigating party's position...or the unreasonable manner in which the case was litigated."

Put differently, a patent defendant gets its fees if the plaintiff's case sucked or the plaintiff's attorneys acted like pricks.

If courts don't go with Octane Fitness, then the logical test is the two-part standard California courts apply and which many others have adopted. Why California? Because it has by far the most experience with trade secrets cases, and because the test has worked in application. That test simply looks at whether the claim is objectively specious and whether there is evidence of subjective misconduct. Again, seems reasonable and relatively easy to apply, with needed flexibility but actual, you know, standards.

So which did Conxall choose? Um, neither. (The court didn't bother citing Octane Fitness and suggested federal courts were asleep at the wheel by adopting California's standard.)

The court held that the standard for determining bad faith is either (1) whether the pleadings, motions or other papers violate Rule 137 (the equivalent of Federal Rule of Civil Procedure 11), or (2) whether the party's conduct violated the spirit of Rule 137, which is to prevent an abuse of the judicial process. Part one of this "test" offers nothing, since as the court acknowledged, a separate statute already provides for fee recovery. In that sense, the legislature would never enact a fee-shifting clause that entirely and perfectly overlaps with another law.

The court then unhelpfully suggested that Rule 137 cases may provide guidance, but that courts shouldn't be limited by those precedents. No clue what that means. And then the court further suggested the California test was "less strict" than the test that it set forth. But it never explains how an objectively specious action with some evidence of subjective misconduct is "less strict" than an action that looks like an abuse of process.

Welcome to the semantic jungle.

By comparing its bad faith test to what California uses, the Illinois courts provide virtually no guidance to litigants in determining what conduct will allow a defendant to recover fees. Under transitive reasoning, California precedents become unhelpful and a trial court judge will be hard-pressed to even view them as authoritative. And by focusing trial courts (confusingly, but still focusing nonetheless) on a pleading standard, the appellate court ignored one major truism of trade secrets law.

Bad faith is almost never defined by a four-corners look at the pleadings. Crappy trade secrets cases often have marvelous complaints. Along the same lines, as one of Conxall's justices described, bad faith usually is exposed at trial - even after summary judgment - when a withering cross-examination reveals a case's deficiencies.

The very reason that trade-secrets suits are so punishing is that a court has no incentive to resolve them before trial. They come alive in the courtroom, when the case weaknesses are fully exposed and the plaintiff has nowhere to run. By looking to the pleading rules, the court has done defendants with strong positions on the merits a grave disservice.

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