38 Minutes of Hell

I've represented defendants in some pretty stupid lawsuits. But 2017 is proving a banner year.

Earlier this year, I had client get served with a claim for inevitable disclosure of trade secrets. From the outset, the case was a pure head-scratcher because there were no facts that so much as hinted at trade secret misappropriation. And, here's one for ya, my client had a non-compete agreement. In point of fact, he did leave his job to go work for a company in the same industry.

So why on earth would the plaintiff not sue on its non-compete and proceed on the inevitable disclosure claim?

Simple.

The Illinois Appellate Court previously had found this company's non-compete unenforceable as a matter of law. It turns out the company learned nothing and never altered its void non-compete in any meaningful way. So, quite obviously, a contract-based claim would have gone nowhere.

So enter inevitable disclosure - the Kim Jong Un of legal claims. The theory was that my client couldn't work for a competitor on the grounds that he inevitably would disclose his former employer's trade secrets - in effect a diabolical work-around to a non-compete that the employer knew it couldn't enforce.

We had none of it, filed a motion to dismiss, and won. It was not close.

The plaintiff's lead attorneys - probably operating under directions from their client to abuse the legal process and prevent competition - then filed a bad-faith, frivolous amended complaint trying to add facts that would suggest some plausible risk that my client might disclose trade secrets.

The facts in this new complaint were so hopelessly convoluted they took about 3 pages of allegations to explain the theory, an ersatz diatribe laden with a cloak-and-dagger reference to a "Customer 1" (as if this is some sealed indictment). The logic was tortured and made no sense, due in large part to the fact that my client had no contact with "Customer 1" and the sequence of events was totally fucked up.

Luckily for the plaintiff, they had another attorney. A really good one, kind of a local counsel, who had common sense. And I feel this attorney must have put the brakes on all the dicking around after I notified everyone that Complaint 2.0 sucked just as badly as the first version.

So the case settled. The plaintiff released us from the non-compete it had and got zero out of the case except a bunch of obvious representations from my client that he had done nothing wrong. (This, I am quite certain, the plaintiff knew. But who the fuck cares about the truth when your client pays your padded bills?) There's no doubt the plaintiff dodged a sanctions motion (which I would have taken up to the appellate court for free in the unlikely event we lost).

But what did law firm insist on in the settlement agreement? A deposition of my client. That's right - a deposition after the case settled, after the claims had been released, and after the action had been dismissed with prejudice.

Who thinks of this garbage? Is this part of orientation day, where you get schooled on how to maximize the billing opportunities in your file? Or is this client-driven, an attempt to show that, frivolous suits be damned, I'll have the last word by golly!?!?

So the purpose of the deposition? To confirm my client was telling the truth in the settlement agreement when he represented he didn't take anything and wasn't soliciting his former clients. As if he would do that. In yet another epic move, the plaintiff's lawyer calls me and tells me he does this sort of deposition all the time.

By that, I now assume he meant that he files a bunch of stupid cases, dismisses them, and then bills for more work after the case is over. We agreed because we had nothing to hide and just wanted this over.

The deposition went forward yesterday. And that's where the title of this post - "38 Minutes of Hell" - comes in.

It wasn't 38 minutes of hell for me. And it damn sure wasn't 38 minutes of hell for my client. It was 38 minutes of hell for them. Because big law firm (two lawyers) and big corporation got to sit across the table from me and my client and see how utterly fucking stupid their lawsuit was. I hope it was as humiliating as it felt. I know it was.

Why do I share this story?

For all the non-compete apologists out there, another story needs to be told. This kind of bullshit that I just told in this blog post goes on every day. Lawyers who file and maintain frivolous anti-competitive suits need to know that it will not end well. It could be a big fee judgment. Or it may be an appellate court telling them their clients' non-compete is awful.

Or it could be just as satisfying - 38 minutes of hell, pure and utter humiliation, watching a replay of your crappy work before your very eyes.

The Reading List (2017, No. 16): DuPont Suffers Another Theft

Non-Compete and Trade Secrets News for the week ended April 21, 2017

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DuPont Employee Charged with Trade Secret Theft

No company has had bigger problems with trade secret theft than DuPont. And this problem is not ending anytime soon. The latest alleged misappropriation arises out of New Jersey and has resulted in a criminal complaint against retired chemical engineer Anchi Hou. The facts follow a familiar pattern, if they turn out to be true. Hou allegedly downloaded 20,000 files on DuPont's flexographic printing plate technology before his retirement. Chemical and Engineering News reports on the federal charges. A copy of the Criminal Complaint is available here.

Texas Trade Secrets Fee Boondoggle

A while back, I wrote a brief snippet on an absolutely bonkers trade secrets case in Texas called M-I, LLC v. Russo, where a jury found that an employee had failed to comply with a confidentiality agreement and awarded the ex-employer $500,000. But the same jury found the employer pursued a trade-secrets claim in bad faith and awarded the defendant $200,000 in fees. As one might expect, the lawyers had sumpin' to say 'bout that. A Law360 article by Michelle Casady details the trial judge's exasperation with both sides and his feeling that the whole lawsuit was a "waste of time." This post is definitely worth a read to understand how many judges feel about petty competitive lawsuits that seem only to benefit the lawyers.

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Seyfarth Shaw's Trading Secrets blog has an excellent summary of the trade-secret status afforded customer lists. This particular category of claimed trade secrets generate a high-volume of lawsuits, particularly in the employment context. Courts' treatment of customer lists is highly case-specific because there are so many countervailing arguments. It's crucial to show an act of misappropriation, such as an improper physical or electronic taking of some information.

Automaker Tesla has settled its non-solicitation and trade secrets suit with ex-program manager Sterling Anderson. Anderson was instrumental in developing Tesla's auto-pilot system and allegedly downloaded a number of documents to his laptop upon departing Tesla for Aurora Innovation. Apparently, the settlement was non-confidential, as several outlets (including Fortune) report that Tesla will receive a $100,000 payment and some ongoing ability to audit Aurora Innovation's intellectual property. Out with a whimper, in other words.

Eric Ostroff has written a nice post about a comical incident of trade-secret disclosure by the Orlando Magic, when it tweeted out a picture of a whiteboard listing targeted players it may want to acquire. This proves that the Magic are still incompetent in so many ways.

Law360 reports on a newly-filed case in Illinois state court in the fragmented and highly competitive custom suit industry. It apparently arises out of an ex-employee's departure from Daniel George and new position with ESQ Clothing. According to the report, the employee - Grant McNamara - worked at Daniel George for only a few months but was bound by a fairly broad non-compete. The complaint also appears (from the report at least) to claim "inevitable disclosure" of trade secrets. A few months' employment seems like a fairly weak starting point on which to base an inevitable disclosure. Then again, by definition, they're all weak.

In case you haven't heard, Bill O'Reilly is out at Fox News after the (delayed) fall-out from over a decade's worth of sexual harassment accusations and settlements. The Hollywood Reporter says that O'Reilly's severance agreement terms aren't yet known but that "a non-compete clause will be among them." This is one instance in which I'm all in favor of strict enforcement - in the unlikely event it would ever become necessary - without any regard for a balancing of competing interests.

Utah Business had a terrific article this week on how Utah employers perceive and use non-compete agreements. The article cites a number of statistics that likely parallel the experiences of employers in other States. Utah passed a more restrictive law last year that curtailed the permitted scope of non-compete agreements and enabled employees to obtain attorneys' fees in certain actions.

Finally, Cara Bayles has a Law360 piece on Anthony Levandowski's appeal of an adverse discovery ruling in Waymo LLC v. Uber. Levandowski actually filed a motion to stay entry of the April 10 Order with the Federal Circuit (not the Ninth). I wrote last week about this April 10 discovery order. In general, it concerns the Fifth Amendment issue Levandowski raised concerning Uber's production of a privilege log that would detail some allegedly misappropriated Waymo trade secrets.

The Reading List (2017, No. 15): Trade Secrets Theft and the Fifth Amendment

Non-Compete and Trade Secrets News for the week ended April 14, 2017

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The Fifth Amendment and Document Production

The Fifth Amendment, and its guarantee against self-incrimination, plays a role in civil litigation and certainly in trade-secret suits. Claims of theft implicate criminal prosecution both at the federal and state level. And while many prosecutors would decline to get involved in a garden-variety civil dispute, the Sergey Aleynikov and David Nosal experiences we have seen suggest that any line-drawing efforts between civil and criminal fact-patterns are tough for anyone to draw. When it comes document production, the general rule is fairly straightforward: the mere act of producing documents (think stolen plans or diagrams) may be a testimonial act for Fifth Amendment purposes. It may, to that end, be an admission that a person has documents that another claims were stolen.

The big trade secret case of the year is in the Northern District of California between Waymo and Uber. And it centers largely on Anthony Levandowski's alleged downloading of 14,000 documents. The case has taken on a life of its own, with twists and turns arising nearly every day on a host of substantive and procedural issues.

One particular filing of interest, though, is Levandowski's effort to avoid having Uber disclose detailed information about the allegedly downloaded documents. The unusual part of Levandowski's motion is that it does not come at the document production stage; instead, he attempted to claim Fifth Amendment rights in Uber's production of a privilege log concerning a particular "due diligence report" that related to Uber's acquisition of Levandowski's company after he left Waymo.

Levandowski's brief is an interesting take on the Fifth Amendment and the testimonial act of document production. It touches, crucially, on issues of attorney-client and common-interest privilege, given a joint defense arrangement between Levandowski and Uber. Here, Levandowski is trying to say that the joint defense between he and Uber allow him to step into the shoes of Uber and prevent it from disclosing details on a privilege log about the due diligence report. Note that Levandowski is not a party to the Waymo suit, but the conduct that is most relevant involves him directly and the allegedly mass download of Waymo materials. Levandowski's brief is available here.

Yesterday, Judge Alsup denied Levandowski's motion, holding that compelling Uber to produce a conventional privilege log would not violate Levandowski's Fifth Amendment rights. The decision is available here. Judge Alsup found that "mere invocation" of one's Fifth Amendment rights cannot automatically supplant conventional privilege log requirements. To this end, he stressed the need for "targeted factual support" - like a privilege log itself - that lends the Fifth Amendment assertion some plausibility.

Interestingly, Judge Alsup touched on an argument not really advanced but which it seems as though he felt was percolating under the surface. He rejected the idea that Levandowski could claim a privilege if the subject due diligence report was provided to Uber so Uber could see whether Levandowski was arriving with baggage - namely a potential trade secret claim to defend. Judge Alsup noted that one cannot use the attorney-client privilege to cloak wrongdoing through "due diligence." Therefore, as a result of the ruling, Uber will have to place the particulars of the due diligence report on a privilege log for Waymo to see. Whether Levandowski will assert further Fifth Amendment rights to its ultimate production remains to be seen. But I think I know the answer.

Bad Faith in California Trade Secrets Actions

I have an article coming out shortly in the Illinois Bar Journal, and it concerns bad faith in trade secrets disputes. In particular, I discuss Illinois' rule that is akin to a Rule 11 "frivolous pleading" standard. I also discuss the rule that seems to prevail elsewhere - the two-part test used by California courts, focusing on objective speciousness and litigation misconduct. As the Court of Appeal in Vescovi v. Clark makes clear, that test is really a one-part test. Objective speciousness probably is enough, because the litigation misconduct derives from the specious nature of the claim. Vescovi is unpublished, but it's a good read nonetheless. A copy of the opinion is available here.

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James Flynn of Epstein Becker & Green published a nice piece on Law360 concerning Justice Gorsuch's track record of resolving trade secrets disputes while a Tenth Circuit judge. It is worth a read.

The Reading List (2017, No. 14): Showing Irreparable Harm Requires Actual Facts

Non-Compete and Trade Secrets News for the week ended April 7, 2017

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Franchise Non-Competes and Irreparable Harm

Disputes over franchise non-competes arise less frequently than employment-based covenants, but they tend to produce some interesting results. Often, they are combined with claims for trademark infringement if franchisees continue to promote their business using the same signage, slogans, or other source indicators that were part of the original franchise relationship. But other times, the franchisee simply ends the relationship and starts a completely separate business in the same territory.

A district court in Nebraska confronted precisely this type of fact-setting in Colorado Security Consultants, LLC v. Signal 88 Franchise Group and denied a preliminary injunction motion brought to enforce a 3-year non-compete. The interesting aspect of the decision, which is available here, concerns the discussion about "irreparable injury," a required element that a plaintiff must prove to establish injunction relief. The court was critical of the plaintiff's conclusory evidence about customer contact. And, at least according to the facts available in this opinion, it appeared the way in which the franchisor elected to end the relationship may have been a contributing factor in the court's denial of its injunction motion. The lesson here is intuitive. If you're asking for injunctive relief, then you need to demonstrate actual, concrete evidence that illustrates how continued competition threatens imminent injury. Abstract statements or mere suggestions of future harm won't cut it.

Bad Faith in Trade Secrets Actions

The bad-faith fee-shifting clause under the Uniform Trade Secrets Act allows for a "prevailing party" to recover fees. By definition, it does not apply to counsel. A successful showing of bad faith by a defendant entitles him to fees only from the plaintiff itself.

Last year, a California Court of Appeal decision in a case called Cypress Semiconductor found that a plaintiff's voluntary dismissal without prejudice did not prevent a defendant from claiming it had been a "prevailing party" for purposes of claiming fees under the bad-faith provision. This past week, the Illinois Appellate Court in an unpublished and non-precedential order disagreed with Cypress Semiconductor. It found that the term "prevailing party" could not include a voluntary dismissal without prejudice. The case is Matrix Basement Systems, Inc. v. Drake.

In the interest of full disclosure, I joined the representation of Tom Drake on appeal after the circuit court had denied his fee petition. Obtaining reversal of an order denying a motion for sanctions is quite difficult under an "abuse of discretion" standard of review, but I felt that Mr. Drake more than deserved a vigorous appeal. The appellate court's order, while not giving us the desired outcome, certainly helped establish that Mr. Drake was the victim of a completely meritless suit that never should have been filed in the first place. The circuit court found that Matrix Basement Systems had indeed lodged allegations against him that were false, but that this alone wasn't enough to warrant sanctions.

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On his Michigan Employment Law Advisor, Jason Shinn has a more in-depth discussion with practical tips on Estes Forwarding Worldwide v. Cueller, the "Google Drive" access case I discussed two weeks back. The tips he offers are geared towards employers who need to secure web-based storage accounts from improper employee use.

Michael Elkon at Fisher & Phillips has an excellent compliance-oriented post dealing with the hiring of employees from competitors. This lengthy post covers a number of specific questions and procedures employers should be asking and investigating when hiring new employees from competitors.

Korn Ferry, the executive search leader which pursued the high-profile Computer Fraud and Abuse Act case against David Nosal, finds itself on the other end of a competition dispute. Spencer Stuart, a K/F competitor, filed suit in Chicago. This case appears to be more of a garden-variety non-compete dispute, but it involves the defection of a group practice leader - Francois Truc - who earned over $4 million a year from Spencer Stuart.

Munger Tolles & Olson released a 2016 Defend Trade Secrets Act Roundup summarizing DTSA filings and major issues that courts have decided under the law as we approach the one-year anniversary of its enactment.

Finally, Seyfarth Shaw this week flagged a pending bill in Missouri that would invalidate restrictive covenants in the employment setting. House Bill 479 would bring Missouri more in line with the California approach to restrictive covenants, which permits them in connection with the sale of a business. We see legislation creep up like this time and again in the States, but it usually is meant to spark debate that leads to incremental reform. Seyfarth's post on the Missouri bill is available here.

The Reading List (2017, No. 9): The First Defend Trade Secrets Act Verdict Arrives

Non-Compete and Trade Secrets News for the week ended March 3, 2017

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Defend Trade Secrets Act

On February 24, 2017, a jury in the Eastern District of Pennsylvania rendered a verdict in favor of Dalmatia Import Group and against FoodMatch, Inc. under the Defend Trade Secrets Act. As of this posting date, the verdict is not available for viewing, but McDermott Will & Emery (counsel for plaintiff) reports that the judgment will exceed $5 million.

The case grew out of FoodMatch's product launch of what Dalmatia called a "copycat line of fruit spreads." FoodMatch previously had been a Dalmatia distributor in the United States but terminated that relationship and began its own competing line of products. FoodMatch also purportedly engaged Dalmatia's contract manufacturer, who apparently knew of the fruit spread recipes, to develop a competing product line.

The DTSA is largely consistent with state law in terms of the damages remedies available to aggrieved plaintiffs like Dalmatia. It is important to note, too, that this was not just a DTSA case; Dalmatia claimed counterfeiting under the Lanham Act. And though the case seemed to progress quickly to verdict given the DTSA's short history (it was signed into law on May 11, 2016), Dalmatia filed the case well before then and added the DTSA claim later.

Nevada Legislator Introduces Non-Compete Bill

Nevada made news last year for soundly rejecting the blue-pencil doctrine. This year, an Assemblyman has introduced Bill No. 149, which would limit non-competition agreements to a duration of 3 months after the end of employment. The bill further codifies the rule-of-reason analysis used by Nevada courts currently. If a company entered into an agreement with a longer, and therefore statutorily unreasonable, duration, it would be subject to a fine of up to $5,000.

The bill has been referred to the Committee and Commerce and Labor. A PDF copy of the bill is available here.

Fee Awards in Texas

Try making sense of this development. A Harris County, Texas jury awarded an employee nearly $200,000 in attorneys' fees after the jury found his ex-employer pursued a trade secrets misappropriation claim in bad faith.

But the same jury awarded the employer nearly $500,000 in attorneys' fees after finding the employee failed to comply with a confidentiality clause. It's hard for me to understand how to reconcile the two awards. A blog post further describes this rather contentious suit.

Overbroad Non-Competes in Louisiana

As I've discussed several times in the past, Louisiana has a very nuanced framework for non-compete agreements. Most importantly, non-competes must specify a parish or municipality where the restriction applies, and the employer must do business there. Courts have been strictly applying this language.

In Affordable Roofing v. Artigues, 2:16-cv-16872 (E.D. La.), a federal district court determined that a non-compete applying "in any state" where the employer conducts business was void. The employer conceded this but argued the employee in any event knew precisely where the employer did business. As is fairly obvious, such an interpretation would violate the plain language of the statute. A copy of the Order is available here.

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.

Bad-Faith in Trade Secrets Litigation and the "Access and Opportunity" Argument

Admittedly, one of my go-to topics is bad faith in the context of trade secrets litigation - if for no other reason than I've seen it time and again in my experience representing defendants.

Most of the rich, intelligently discussed bad faith cases come from California courts, which hear a disproportionate number of trade-secrets suits to begin with. And that state's strong rejection of the inevitable disclosure doctrine gives it ample opportunity to chastise plaintiffs for pursuing defendants (usually ex-employees) on a spurious "access and opportunity" theory of wrongdoing.

That theory is becoming more and more prevalent. The reasoning is utterly fallacious, of course. It goes something like this:

Employee X had certain responsibilities, all of which encompassed some trade-secret knowledge, and now she works at Employer Y in a similar position. Therefore, X must be using the trade secret for Y's benefit.

Though some litigants (let me digress into a Trumpian "believe me, I litigate against them and see this all the time, folks") dress up the theory a bit more with meaningless ancillary facts, those facts are not elemental - meaning that if proven they still can't close the deal.

The "access and opportunity" doctrine is one that hasn't necessarily received uniform treatment by courts (more on this in my next post, a very informative Fourth Circuit opinion). Some give it more credence than it clearly is due. But increasingly, courts seem apt to reject it as overly simplistic and little more than a backdoor attempt to impose a non-compete agreement where the parties never bargained for one.

I really enjoyed reading RBC Bearings v. Caliber Aero, 2016 U.S. Dist. LEXIS 100521 (C.D. Cal. Aug. 1, 2016), from the Central District of California, where the plaintiff got whacked for $130,000 in fees for pursuing a trade-secrets claim in bad faith. The case is a good read because it systematically walks through how courts assess bad faith. (Another digression: The $130,000 in defense fees is right in the wheelhouse of what I have seen in garden-variety employee trade secrets cases that go to judgment and that do not involve highly technical concepts. For technical trade secrets, the fees normally are quite a bit higher.)

Courts first look to see whether the case was objectively specious, meaning that it was notable or stood out for its weakness. As in many cases, the plaintiff in RBC Bearings couldn't prove an act of misappropriation. The "access and opportunity" theory was patently deficient because that conclusory leap is not enough to establish that an insider misappropriated anything at all. To compound the problem, RBC Bearings' identified trade secrets (a list of customers) were publicly displayed (on the plaintiff's website). Problem.

In California, courts then look to subjective purpose, in addition to the weakness of the claim. This is still troubling, to me, because requiring a defendant to prove an improper purpose is exceedingly tough. But to its credit, the RBC Bearings court did go through a rigorous analysis focusing on a few different factors that suggested an improper motive: satellite litigation that suggested an intent to run up legal fees for the defendant, evidentiary shortcomings (which is usually duplicative of the objective speciousness requirement), and improper settlement demands.

The last factor is a very interesting one, because plaintiffs often are careless with demanding money in trade-secrets claims even when that demand is not provable in court. Not all settlement communications, remember, are privileged. They are to the extent one tries to use that communication to prove liability, but they aren't to ascertain whether bad faith exists. Plaintiffs who use litigation as a weapon often fall into this trap because they want to show how tough they are. Counsel who reflexively parrot what his or her client says about demanding an exorbitant amount to compromise a claim walk right into a trap, particularly at the time of fee-shifting. The RBC Bearings court specifically discusses counsel's ethical obligation to make a good-faith settlement demand and not one that is divorced from an evidentiary analysis. This is something I've never seen discussed before in such stark, yet pragmatic, terms.

Also of interest was the court's assessment of plaintiff's counsel. Aside from the unprofessionalism of demanding a settlement payment that would not be provable and pursuing a crappy case, the court was clearly bothered by counsel's inability or unwillingness to cite precedent accurately. I am experiencing this same problem in a protracted case where counsel repeatedly misstates the record, trial evidence, or case law - to the extent that it's obvious he thinks no one will call him on it. Credibility is all a lawyer has. And in RBC Bearings, the court made clear that a lack of credibility informs a bad-faith finding.

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.

On Predatory Lawsuits and Bad Faith in Trade Secrets Claims, California Continues to Lead the Way

Trade secrets claim are inherently fraught with a startling reality: they have the potential to morph into opportunistic litigation.

What I mean by this is that a party can use a trade secrets lawsuit for a purpose unrelated to the merits. Put another way, the suit can be a means to heap costs on smaller competitors, discourage the development of a competing product or service, or deter perfectly lawful employee recruitment. Trade secrets suits are often fraught with complexity, which means that it's hard for a judge to snuff out bad faith. They also are exceedingly difficult to dismiss early, because they are fact-intensive. These factors, and more, result in a potential toxic brew that can masquerade a plaintiff's bad faith until well into the litigation process.

I have been fortunate (or, from my client's perspective, unfortunate) to have litigated for the defendants a bad-faith trade secrets claim all the way to the Seventh Circuit Court of Appeals. In Tradesman Int'l, Inc. v. Black, 724 F.3d 1004 (7th Cir. 2003), the Court found under Illinois law that a trial court need not examine a plaintiff's bad faith at the time a lawsuit is filed. Rather, the inquiry is more flexible, and a court is empowered to award fees if it maintains a suit in bad faith. By definition, this requires an ongoing examination of a case to determine if and when a party's bad faith starts.

The Tradesman case is one of a handful of cases - indeed, one of the most important - outside California that examine the notion of bad faith in the specific context of a trade secrets suit. The Uniform Trade Secrets Act, adopted by nearly all states, allows for fee-shifting if a prevailing defendant illustrates bad faith. But relatively few cases reach that stage, and even fewer result in persuasive opinions that practitioners can use for future guidance.

Enter Cypress Semiconductor Corp. v. Maxim Integrated Products, which is surely the most important bad faith case since Tradesman. The case does not establish any new law, as California already has cemented its two-part "objective speciousness/subjective bad faith" test. But the facts of the case, and the Court of Appeal's analysis are powerful and serve to guide lawyers over the bad faith question.

The case arose out of nothing more than Maxim's apparent recruitment (through a headhunter) of Cypress employees - particularly in the area of touchscreen technology. Since California has banned employment non-compete agreements, the broad theory of trade secrets liability ("you're targeting our employees to acquire trade secrets") was dubious out of the gate. Even more problematic for Cypress was California's refusal to adopt the "inevitable disclosure" doctrine - which is broadly used as a justification to enforce non-competes and is more controversially used sometimes as a free-standing claim to bar competition even in the absence of a non-compete.

So, from the start, Cypress' case was in trouble. It veered further off the rails when Maxim demanded a trade secrets identification, which California law requires early in the case. Here's what Cypress disclosed:

(1) A compilation or list of Cypress employees who worked with Cypress's touchscreen technology and products area and their employee information, including contact information.

(2) Cypress's substantive confidential information regarding its proprietary touchscreen technology and high performance products.

Well now. That's seems compelling.

As for category (1), Cypress ran into trouble when Maxim found those same employees - whose identifies were apparently trade secrets, in the Cypress world - on LinkedIn and other social networking sites. Problem.

As for category (2), I am not sure what to say. Identifying your trade secrets as "substantive confidential information" regarding all your products seems a wee-bit circular. Adding adjectives was not all that helpful.

The opinion (embedded below) is replete with an often harsh characterization of what Cypress did with this profoundly silly lawsuit. It supported its bad-faith finding with a wide-ranging criticism of Cypress's improper identification, rank speculation that Maxim even was offering Cypress employees positions on touchscreen technology, and its use of litigation to achieve an improper purpose.

Of greater interest, though, was Cypress's novel defense: since it voluntarily dismissed the lawsuit, Maxim could not be a "prevailing party" under the bad-faith statute. Here, the theory was that Cypress could have refiled the case in the future. Demonstrating a fair amount of arrogance, Cypress contended it was the prevailing party since Maxim voluntarily stopped soliciting Cypress's employees.

The Court of Appeal reached a pragmatic result by rejecting this voluntary dismissal defense. By finding that the plaintiff acted in bad faith, a court will have ensured that the defendant did not achieve some "superficial or illusory success" by virtue of the voluntary dismissal. Put another way, the bad-faith finding is itself a determination that the plaintiff would have lost - badly, in fact. Therefore, there is no real justification for denying fees to a defendant who wins simply because the plaintiff elected to ditch its case in the face of inevitable loss. The Court asked rhetorically "why a party who has made a trade secret claim in bad faith should be permitted to inflict the costs of defense on his or her opponent."

In finding that Maxim was the prevailing party, the Court of Appeal sensibly resolved an issue that trade secrets defendants fear (particularly in state court): the plaintiff's use of expensive litigation to achieve some temporary objective - a standstill agreement to stop competing, piling on of legal fees - only to cut and run after it sends its marketplace message. In these circumstances, a defendant can be left holding the bag with fewer fee-shifting options because it will not have a judgment on the merits.

But as the Court found, the bad-faith finding is tantamount to such a judgment because it serves as a finding that not only was the defendant not liable, but also that the plaintiff knew from the start that it never could be. From a policy perspective, the bad-faith statute has far less teeth if the plaintiff can use the safe-harbor of a voluntary dismissal to avoid even the specter of a fee claim. This is the sort of loophole that should a liberal construction of the bad-faith statute can close.

The issue of bad faith and predatory litigation is one that is not going away, and the Cypress decision serves as a road map for how defendants can fight back against frivolous, anti-competitive claims.

Cypress Semiconductor v. Maxim Integrated Prods. (California - Bad Faith) by Ken Vanko

Unreasonable Settlement Demands Illustrate Bad Faith In Trade Secrets Cases

Most attorneys believe everything said in a settlement letter is privileged through the Rules of Evidence.

This is decidedly not so.

The purpose of the evidentiary privilege is to preclude a jury from concluding that an offer to resolve a case suggests liability (on the part of the defendant) or weakness (on the part of the plaintiff). In trade secrets disputes, though, settlement statements that rise to the level of specious demands are not protected because they don't pose a risk of prejudicing a jury.

Trade secrets cases can go south in a hurry unless a plaintiff has done serious homework. And even if there has been a misappropriation, many times the plaintiff will have no shot at proving damages. That, however, does not preclude a plaintiff from making an outrageous demand. There are a number of courts that have assessed unreasonable settlement positions in the context of bad faith fee petitions for prevailing defendants.

An interesting, though non-precedential, decision from the Court of Appeal of California in Aerotek, Inc. v. The Johnson Group Staffing Co., Inc., affirmed a bad faith fee award of over $700,000. The court specifically looked at unreasonable settlement demands the plaintiff made, including a demand following a loss at trial, as evidence of bad faith.

Also of interest to the court:

• An expert's apparent unawareness that one of the customers on which he based his lost profits calculation was no longer in business; and
• A third-party witness's testimony that a plaintiff representative talked about the plaintiff's deep pockets and intent to shut the defendant's business down.

The interesting part of the case was the fact that the plaintiff actually won at the first trial, and the defendant stipulated that the customer list at issue was in fact a trade secret. Under such facts, its unusual to see a court find bad faith on the part of the plaintiff in bringing the case.

However, in California, there already is a strong public policy favoring open competition. Judges tend to view these cases more skeptically to begin with, and a case that might appear somewhat close still can yield a bad faith finding in California. Ultimately, it was clear that the plaintiff in Aerotek had a foundering case and doubled down. Maintaining a bad case will not endear any plaintiff's lawyer to the judge.

Dumb Settlement Comments Can Help Establish Bad Faith in Trade Secrets Case

There's a perception that anything written in a settlement letter is privileged.

This perception is decidedly wrong.

Offers of settlement are not admissible to prove liability because we want to encourage parties to resolve their disputes out of court. If those offers were admissible, then parties would be hesitant to mediate disputes. This is a simple, common-sense rule. But that rule doesn't give a party carte blanche to say whatever it wants in a settlement letter and then hide under the cloak of privilege.

As readers of this blog know, trade secrets disputes can go horribly wrong for plaintiffs, my case of Tradesmen International v. Black from the Seventh Circuit being a recent example. But because of the overly emotional nature of competition cases, plaintiffs frequently double down when litigation goes south. It is quite common, in fact, for trade secrets plaintiffs to make outrageous settlement demands, or ridiculous statements in a settlement letter, even in the face of a significant defeat.

Those plaintiffs better be careful what they say in settlement letters, however.

If those letters contain over-the-top missives, improper threats, or even pie-in-the-sky demands, the statements aren't privileged and can help establish bad faith. Remember: a defendant gets his attorneys' fees if he can prove a plaintiff brought or maintained a trade secrets misappropriation claim in bad faith.

So what kind of statements in a settlement letter are not privileged? Generally, I find there are two categories that get plaintiffs in trouble.

First, the plaintiff often makes comments about how much continued litigation is going to cost, or indirect references to the fact that an appeal is going to be expensive for a prevailing party to defend. These sort of threats aren't privileged because even an idiot lawyer knows that further litigation costs money, and it's completely disconnected from an offer of settlement. Threatening a defendant into spending further legal fees indicates the plaintiff simply is pursuing litigation to force its adversary to bear the burdens of litigation - not to achieve a specific result at judgment.

Second, the plaintiff may make irrational demands as part of a settlement term sheet - often times totally disconnected to the actual dispute. In past cases (both in Iowa and California), courts have looked to outrageous settlement demands that have nothing to do with trade secrets claims as evidence of subjective bad faith. For instance, demanding a broad non-compete in California (where non-competes are unenforceable) as part of a settlement would demonstrate bad faith intent. So, too, would damages demands far in excess of a trial disclosure and demands to avoid certain customers or product lines, even though this is not part of the relief sought in the complaint. Even though these are terms of the offer, they aren't privileged as settlement communications because they don't tend to establish the plaintiff's case is worth less than what it claims.

Settlement letters are potential land-mines in litigation. If a trade secrets plaintiff says anything beyond conveying the offer, those statements could help show bad faith. As with most letters, it's best to keep it short and to the point.

Seventh Circuit: Test for Determining "Bad Faith" In Trade Secrets Case Is Common Sense

This is a case I know a little something about.

When Tradesmen International sued my clients in May of 2010 , the outcome was already clear. The claims were garden-variety; the facts weren't. The individual defendants moved out of state to avoid the territorial restriction of their non-compete contracts to form a new business that supplied labor to the construction industry.

Tradesmen elected to take the dreaded shotgun approach to litigation. Instead of honing in on the contract-based claims (which it was destined to lose), it made a broad allegation of trade secrets theft. In particular, it claimed that Dun and Bradstreet reports - purchased through a commercial service for a fee and which some of the defendants had access to - were "trade secrets" that independently barred my clients from competing.

There were a couple of, to put it mildly, problems with this theory:

1. Anyone can buy Dun and Bradstreet reports, which my clients did after they left Tradesmen.

2. Tradesmen took virtually no steps (I say, none) to preserve the "secrecy" over these reports (for good reason; such security measures would yield no marginal benefit given their availability).

3. Tradesmen admitted my clients never used the reports they had at Tradesmen to build their business.

(Actually, there were tons of other problems, but I'll have to simply ask you to check out the briefs I filed. I can't do justice in a blog post to this train-wreck of a case.)

So when the defendants successfully obtained summary judgment, I moved for my legal fees under the Illinois Trade Secrets Act. Like many versions of the Uniform Trade Secrets Act, the Illinois version allows for fee-shifting if a plaintiff makes a claim of misappropriation in "bad faith." To me, there was virtually no doubt Tradesmen pursued its claim in bad faith, but Illinois courts never addressed how this provision should be interpreted. And the district court judge had no guidance.

Ultimately, Magistrate Judge Bernthal addressed a novel issue of Illinois law and ruled the trade secrets claim had to have been "filed" in bad faith rather than "maintained" in bad faith. That later was the essence of my argument. In short, I argued a more flexible standard was appropriate since trade secrets claims have the capacity to serve anti-competitive goals, as exemplified I felt by Tradesmen's litigation conduct.

The Seventh Circuit agreed and reversed the district court order. A copy of the Opinion is embedded below. The court held that a defendant is liable for fees if it filed or maintained a trade secrets claim in bad faith. More particularly, the court stated "common sense" supports such an interpretation because "a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit - even after it becomes clear that she has no chance to win the lawsuit - in order to cause harm to the defendant." Because the district court had used a narrow, "point-of-filing" inquiry, it didn't consider the proper range of factors bearing upon bad faith. And it didn't examine the "no chance to win" scenario that I felt should have been the focus of the bad faith motion.

For my clients, the issue is of obviously of great significance. But for the law, what's the impact? In my mind, a couple of considerations come to mind:

First, trade secrets plaintiffs have a greater incentive to investigate and develop their claims. They cannot, in other words, hide behind what they believed to be true at the time of filing the lawsuit and then sit back and tax the defendants in the form of lawyer's fees to achieve a win. This should encourage greater scrutiny over claims that pose a great risk of serving an anti-competitive purpose and will require a continuing reassessment of a case during litigation. In my appellate brief, I discussed this at length and argued for a flexible inquiry that takes into account the unique dynamics of trade secrets suits.

Second, fee hearings at the conclusion of a lawsuit will require a district court to be flexible in what factors it considers. Courts normally consider both objective and subjective factors to determine bad faith. In other words, what did the plaintiff do and what did it say? The inquiries overlap to a great extent, because often times the best evidence of intent is the lack of merit. With a broader standard to consider, courts will have to examine the record, the development of the claims, discovery answers, litigation conduct, and a failure of proof on key elements to establish the cause of action.

Third, if a defendant claims a suit has been "maintained" in bad faith, it must be prepared to make an articulable, intelligent analysis of when the bad faith began. Put another way, it will need to look at key moments of the lawsuit and identify that point when a continuum of "bad faith factors" coalesces into actual bad faith. This likely means a fee hearing will be a combination of evidence presentation (a mini-trial of the plaintiff's low moments, in other words) and legal argument.

***

In my next post, I'll discuss the Seventh Circuit's analysis of Tradesmen's overbroad non-compete agreement and how some of the key facts in my case played into the court's extended discussion as to contract enforceability.

Tradesmen Int'l v. Black - Seventh Circuit Opinion by Ken Vanko

2012: Year-End Review and Top 10 List

And so concludes my fourth full year of writing non-competes.com.

I've now written over 400 articles on this site. I strive to provide fresh, interesting commentary on a range of practical, legal, and economic issues relating to non-compete and trade secrets law.

What was new to this site in 2012? Three major changes.

First, while I had intended at the start of the year to provide everyone with a weekly "Reading List", I discovered Twitter along the way. I had long avoided Twitter, for fear that the last thing my life needed was one more informational tool. Boy, was I wrong about Twitter. This is where I am increasingly getting the best content, and I encourage my viewers to follow me on Twitter to see what I am reading and who I'm following.

Second, I have started embedding files into certain posts, so that my readers can read and downloand important opinions or filings (such as the U.S. v. EBay, Inc. Complaint). I have a couple of bar journal (i.e., "old" media" publications) coming out in 2013 and look forward to sharing those files on this site as well.

Third, I waded into the world of legal podcasting with Non-Compete Radio. All of those podcasts are available on iTunes and can be accessed here as well. More on podcasting in the next few weeks...

My year-end column is my favorite because it gives me an opportunity to look at what I've read and written about for the past 52 weeks and figure out what this year really was like in my corner of the legal universe.

So here are my Top 10 Developments for 2012:

10. New Hampshire Enacts "Notice Period" for Non-Competes. Effective July of 2012, New Hampshire state law now requires employers to give two weeks prior notice when an employer asks an employee to sign a non-compete or non-solicit agreement. The law is full of potential loopholes. My earlier post on this legislation is found here.

9. Texas Courts Largely Silent in 2012. The most active state supreme court on non-compete law over the past several years has been Texas. It has completely redefined the concept of acceptable consideration, an issue that befuddled courts and lawyers for a number of years. But 2012 was notable in one respect: not much happened. While I have written often about developments under Texas' Covenants Not to Compete Act, I only had one Texas-related post this year. I am predicting 2013 to be a lot different.

8. New Jersey Enacts Uniform Trade Secrets Act. At the beginning of 2012, New Jersey became the latest state to adopt a version of the UTSA. The Act is only slightly different than what most states have enacted, and it provides a broader set of remedies for employers looking to combat trade secret theft. At this point, only Texas, Massachusetts, and New York have yet to enact the UTSA. My earlier post on this legislation is found here.

7. Sergei Aleynikov's Wild Journey Continues. Many of us in the blogging community have written extensively about the travails of one Sergei Aleynikov, the ex-Goldman Sachs trader who misappropriated GS's trading source code before departing for Teza Technologies. Aleynikov's legal journey has taken him to: the Illinois Appellate Court, a conviction in New York federal court under the Economic Espionage Act, a reversal by the Second Circuit, subsequent state law criminal charges (for which he's pled not guilty), and a federal civil case in New Jersey against Goldman Sachs in which he has sought indemnification for all of his legal fees - which he just might win. Oh, and in the meantime, he's almost single-handedly responsible for getting Congress to pass the Theft of Trade Secrets Clarification Act that will effectively prevent another result like that in his Second Circuit case from occurring in the future.

6. Illinois Appellate Courts Active in Wake of Reliable Fire. I have written throughout the year about what has occurred in my home state - Illinois - since the Supreme Court's important decision last Fall in Reliable Fire Equipment v. Arredondo. Unfortunately, the results have been mixed at best. The judgments from our appellate court have been published as "non-binding" orders and seem to have conflated and confused what Reliable Fire really meant. This lack of clarity does not serve clients or lawyers well at all.

5. The Loparex Disaster. This is Aleynikov-lite. His joyride through the legal system may be somewhat of an aberration (and for that reason, his ranking on my year-end list is lower). But the nightmare litigation of Loparex, LLC v. MPI Release Technologies, LLC is a stark reminder of a trade secrets suit gone horribly wrong. The suit started in federal district court in Illinois, where Loparex took a dismissal when the court (Judge Lefkow) told Loparex it was not identifying its trade secrets correctly. Loparex then refiled in Indiana federal district court and lost the suit on the merits, along with a bad-faith sanctions award against it and its lawyer to the tune of nearly $500,000. The basis for the award: failure to even identify a misappropriated trade secret, and the complete lack of damages. And along the way, the suit made a detour to the Supreme Court of Indiana, which reversed a decades-old line of cases discussing Indiana's Blacklisting statute. Ultimately, that pro-plaintiff ruling did not impact the defendants' ability to obtain fees given the frivolous nature of the suit.

4. DuPont's Judgment Against Kolon Industries. In one the most important trade secrets cases to go to jury verdict in recent memory, E.I. DuPont prevailed in its claim against Kolon Industries to the tune of over $1 billion in compensatory and punitive damages and a 30-year permanent injunction. The technology related to DuPont's trade secrets - 149 of them - related to the manufacture of Kevlar. My colleague, John Marsh, has written extensively about this case on his blog.

3. The Computer Fraud and Abuse Act Circuit Split Deepens. We had two important decisions this year under my least favorite statute, the Computer Fraud and Abuse Act. In U.S. v. Nosal, the Ninth Circuit limited a CFAA claim premised on an employee who "exceeds authorized access" of a protected computer to "access", not "use." And in the Fourth Circuit, the court followed Nosal and took a narrow view of the CFAA, widening an already deep circuit split. In that case, WEC Carolina Energy Solutions v. Miller, the plaintiff has filed a cert petition in the U.S. Supreme Court to resolve the split among the circuits. Will the Court take the case? It might, and this will be an interesting case to follow in 2013.

2. The Ohio Supreme Court Decides Two Important Competition Cases. The Ohio Supreme Court's decisions in American Chemical Society v. Leadscope and Acordia of Ohio v. Fishel were vitally important. In Leadscope, the Court held that malicious litigation can support a common law unfair competition claim. In the process, it upheld a $26.5 million verdict in favor of Leadscope, another result demonstrating that the court (mis)use of legal process can redound very badly to plaintiffs who underestimate how aggressive of a defense their adversaries will muster. In Fishel, the Court reversed itself and held that non-compete contracts are automatically assignable in the course of statutory mergers. The Court had held in an earlier opinion in the same case that the plain language of covenants concerning assignability would control over statutory law.

1. Supreme Court Rules on Scope of Arbitration Clauses. And in the year's most talked-about non-compete case, the Supreme Court of the United States reversed a decision of the Oklahoma Supreme Court and held that an arbitrator, not a state court, must determine the enforceability of a non-compete agreement if the underlying contract contains an arbitration clause. The case leaves open the possibility that an employee can still petition a court to determine that the underlying arbitration clause is invalid. My discussion of Nitro-Lift Techs. v. Howard is found here.

So that's 2012 for ya'. Thanks again to all my readers for the great feedback and to my fellow blogging colleagues.

I'll be back in a few days to start Year 5!

Cook County Order on Attorneys' Fees Illustrates Factors Used to Assess Bad Faith

Earlier this year, Judge Mary Anne Mason in the Circuit Court of Cook County awarded attorneys' fees to a prevailing defendant under Section 5(i) of the Illinois Trade Secrets Act. That provision allows for a defendant to recover legal fees if a claim of misappropriation is made in bad faith.

A copy of Judge Mason's Memorandum Opinion and Order in Portola Packaging, Inc. v. Logoplaste USA, Inc. is embedded below. This was not an employee defection case, but rather one which arose out of the ashes of a failed business transaction. I have a similar bad faith fees issue currently pending in the United States Court of Appeals for the Seventh Circuit in the case of Tradesmen Int'l, Inc. v. Black (Nos. 11-3715 and 12-2032). In that case, my clients petitioned the district court for an award of fees following entry of summary judgment.

By and large, the standard by which to examine "bad faith" under the ITSA (or any of its uniform act counterparts) is somewhat ad hoc. Many courts adhere to a two-part objective/subjective test very similar to that discussed in last week's post concerning the Leadscope case out of Ohio.

Judge Mason's opinion is very interesting in that it shows how a trial court judge, following the conclusion of a trade secrets case, will go back over the evidence and compare it to what the allegations revealed. For instance, one of the factors Judge Mason examines is the plaintiff's failure to retrieve copies of confidential information from the proposed acquiring company after negotiations broke down. During the course of the lawsuit, Portola had continued to insist that it did not demand retrieval of confidential documents because it held out hope of rekindling a business relationship with Logoplaste. As no documents revealed Portola's interest in this "rekindling", Judge Mason was not buying the argument.

This demonstrates that factors other than what is pled in the complaint are highly relevant to the bad-faith inquiry. Further illustrative of this is Judge Mason's reliance on evidence of pre-litigation communications where Portola had examined a litigation strategy because "new suppliers that are caught up in litigation can scare potential customers." This type of evidence, arguably irrelevant to what the allegations say, illustrates motive to pursue a competitor not for the hopes of winning a suit, but simply to deter competition altogether.

Portola Packaging v. Logoplaste - Order on Fees

Ohio's Standard for Malicious Litigation Sounds Familiar

I rely entirely on John Marsh of Hahn Loeser to provide details on one of the year's most important competition cases, American Chemical Society v. Leadscope. For this post, the holding is relevant in that it establishes - at least in Ohio - a two-part test for determining when malicious litigation can serve as the basis for an unfair competition claim. That test requires a plaintiff to show:

(1) that the legal action is objectively baseless; and
(2) that the opposing party had the subjective intent to injure the party's ability to compete.

Leadscope involved a claim of trade secrets misappropration over software code. And the standard the Supreme Court of Ohio adopts is strikingly similar to the tests courts use over related claims. Those claims are:

(1) bad faith fee-shifting petition by a defendant under the Uniform Trade Secrets Act; and
(2) sham litigation under antitrust law.

It makes sense all three claims would have similar tests. The UTSA fee-shifting test does vary from state to state, but in the main the Leadscope test constitutes the majority rule. For defendants who feel as if litigation has served no purpose than to deter competition and impose litigation costs, the main theories of recovery are the following:

(1) An independent tort claim like that advanced in Leadscope. The claim may depend state to state, but generally the theories are abuse of process, malicious prosecution, violation of antitrust law, and unfair competition.

(2) Fee-shifting statutes or contract provisions. The UTSA bad-faith fee-shifting clause is one that is commonly invoked, and is not a "claim" in the sense that a full-blown trial would be required to resolve it.

(3) A court's power to sanction, under its inherent authority, as part of the discovery process, or even against an attorney directly for unnecessarily increasing litigation costs.

The upside of option (1) is that, in theory, the recovery is not limited to attorneys' fees. In Leadscope, for instance, the defendants received $26.5 million in compensatory and punitive damages.

The Reading List (No. 9)

Today's reading list - which is long overdue - leads with a few articles geared towards in-house counsel.

The In-House Advisor has a nice post regarding non-compete considerations for in-house counsel. I am recommending the article because it has a discussion concerning the importance of posting bond if an injunction is granted. That's not a topic I see very often. My view on bonds is that the cases are everywhere. You could see a bond imposed of several hundred thousand dollars in one case, and in a similar case, only a nominal bond imposed. Remember that in federal court Rule 65 seems to require some sort of bond, meaning all of those contracts that say "bond is waived" can't literally be followed.

Great article by Jon Hyman of the Ohio Employer's Law Blog on BYOD ("Bring Your Own Device") policies for employers. This is a very new area, and lawyers are still grasping with how to draft policies and advise clients on what to consider. Jon's focus in his article is on maintaining security, and he has excellent recommendations for in-house counsel.

Drinker Biddle's blog discusses two recent bad faith fee-shifting cases under the Uniform Trade Secrets Act. I previously wrote about one of them, the California case of SASCO v. Rosendin Electric, in this post.

John Marsh of Hahn Loeser has a nice recap of some news stories involving trade secrets theft, including a brief discussion on New York's recent arrest of ex-Goldman Sachs programmer Sergei Aleynikov. I, along with countless others, previously wrote about the Second Circuit's reversal of his federal law convication.

Not technically a "Reading List" topic, but worth mentioning, too, is the Supreme Court of Missouri's opinion in Whelan Security Co. v. Kennebrew, 2012 Mo. LEXIS 167 (2012). The Court found an unlimited customer non-solicitation covenant overbroad, given that it restricted ex-employees of a national security firm from working with any of the firm's customers or prospective customers. The Court noted that while such clauses may be reasonable for a small, localized firm, a non-solicitation restriction without any geographic or definitional parameters was overbroad. However, the Court modified the restriction to give effect to the parties' intentions and to protect the employer. It rewrote the restriction to strike any limitation on soliciting prospective customers and to restrict only solictation of customers the ex-employees dealt with during their employment. The court also upheld a 50-mile general non-competition covenant against one of the two employees - begging the question of whether that validated non-compete achieves the same purpose as the partially invalidated non-solicitation covenant.

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: "...it 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 patents...you 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.

Case Law and Non-Compete News Update

Some interesting news stories and cases to report on this week.

News Stories


A couple of years ago, FLIR Systems engaged in an ill-advised trade secrets action in California which resulted in a substantial fee award to the defendants under a theory of bad faith. Now, the defendants are going after FLIR's counsel in that case, Latham & Watkins, on a malicious prosecution theory of liability. Apparently, the genesis of the claim against L&W arose when the plaintiffs (that is, the defendants in the original trade secrets case) discovered FLIR was invoking the "advice of counsel" defense. There a number of interesting procedural issues which could come out of this, including the possibility that L&W may have a SLAPP defense under California law. Epstein Becker & Green discusses the case.

In this author's opinion, counsel should not be granted an absolute privilege for bad faith or malicious litigation if they act as a mere instrumentality for their client.

John Marsh discusses the high-profile dispute between sports agent Aaron Mintz and Priority Sports Entertainment, a battle taking place in California over a non-compete apparently governed by Illinois law. Given California's clear public policy on non-competes, there certainly will be questions whether the choice-of-law clause is valid. Mintz joined CAA, which represents NBA stars LeBron James, Chris Bosh, Dwyane Wade, Carmelo Anthony and others. Priority Sports is headed by Mark Bartelstein, a graduate of the University of Illinois and a resident of suburban Chicago. Some salacious details of the suit can be found here.

Reported Cases


The Tennessee case of ProductiveMD, LLC v. 4UMD, LLC, 821 F. Supp. 2d 955 (M.D. Tenn. 2011), contains a good discussion of the "same proof" standard to determine trade secrets preemption. This standard essentially examines whether proof of a non-trade secrets claim would also establish a claim for misappropriation of trade secrets. If the answer is yes, the claim is preempted. Most frequently, the same proof test will jeopardize claims of common law unfair competition, unjust enrichment, breach of the duty of loyalty (at least in part), and civil conspiracy. To my knowledge, Hawaii is the only other state which has adopted the "same proof" test of preemption.

Grace Hunt IT Solutions, LLC v. SIS Software, LLC, 2012 Mass. Super. LEXIS 40 (Sup. Ct. Feb. 14, 2012), discusses the Massachusetts rule which voids non-compete agreements if there has been a "material change" in the employment relationship. The rationale for this rule is that a material change equates to a brand new employment relationship, which requires a new non-compete to be signed. An example of a material change would be a reduction in compensation. Interestingly, in the Grace Hunt case, the court discounted the employer's point that the reduced compensation could be made up through bonuses, because the evidence equivocated over whether those bonuses could realistically be achieved.

Franchise non-competes are usually enforced, as demonstrated by Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc., 2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012). As I have noted on this blog before, the interests to be protected under franchise covenants are different than those in an employment contract, even though most franchise covenants are non-negotiable. The interest is not only business goodwill, but protection of the franchise system itself. Often times, the court will examine the interests of third-parties, other franchisees, who need protection. The case was interesting in one respect, however. The non-compete extended to a 100-mile buffer around the ceded franchise territory and other franchisees' territories. This was too broad, almost by definition, and the court cut it back to eliminate the 100-mile buffer language. However, the court did state that the restriction on competition within other franchisees' territories was reasonable.

The Weekly Posner (No. 2)

Because damages are often extremely difficult to prove (and because injunction issues are decided early in a case), attorneys' fees often become the driving force in non-compete or trade secret litigation. Indeed, an early litigation thrust usually means that the legal bills hit mid-five or -six figures before the parties even have an idea of what they are in for.

So for any plaintiff or defendant in an unfair competition lawsuit, the ability to shift fees becomes a driving, paramount concern. The basis for fee shifting usually is found in a contract (a prevailing party clause) or the statute under which a party is suing (or much less frequently, a statute of general applicability).

One common method of attempting to recover fees finds its home in the Trade Secrets Act, which contains a fee provision allowing a plaintiff to recover fees if the defendant's misappropriation is "willful." Conversely (and as a mirror image to the willfulness standard), a defendant can obtain its fees if the suit was filed or maintained in "bad faith." Very little in the way of case law helps us figure out a uniform test, despite the fact the Trade Secrets Act is a uniform act adopted everywhere now but New York, Massachusetts, and Texas.

It is appropriate, therefore, to look elsewhere, including Judge Posner's opinion in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 958 (7th Cir. 2010), where he surveyed the semantic jumble in determining when fees were appropriate for "exceptional" cases of trademark or trade dress infringement under the Lanham Act.

Much of Judge Posner's discussion in Nightingale Home Healthcare discusses the tort of abuse of process and the stark reality that disputes between competitors are often about litigation costs, not judgment-oriented outcomes. Put another way, parties to litigation often use the litigation as the end itself - not a means to an end. As Judge Posner notes, a new market entrant may have a clearly meritorious claim for infringement against a large opponent, but may find itself bullied into submission through a scorched earth defense strategy (and which has no hope of prevailing). On the other side of the coin, a dominant player in the market may sue a new, much smaller entrant on dubious claims just to force that competitor out of the market under the specter of six-figure legal bills.

This is what drives Judge Posner's standard for defining "exceptionality" for purposes of Lanham Act fee shifting. The same considerations likely would motivate him if, and when, he looked at fee shifting under the Trade Secrets Act. Very little separates trademark infringement from trade secret misappropriation, save for the fact the latter is much harder to define. Trade secrets can be made up on the fly, while marks are registered.

So the public policy behind allowing for fee shifting in the trade secrets context has to be the same as that in the trademark context, and Judge Posner likely would focus on whether and how parties in trade secrets suits used the litigation for improper purposes to ramp up lawyers' fees needlessly. These types of suits are too close of cousins for any other result to make much sense. One potential side issue: his opinion in Nightingale Home Healthcare seems to have more applicability to a defense-side fee petition. The exceptionality standard seems more akin to bad faith, than it does "willfulness." Stated another way, a defendant may be liable for the plaintiff's fees if he intentionally stole something he should have known was secret, even if that defendant did nothing to pile on legal fees or engage in vexatious litigation conduct.

Also of significance in Nightingale Home Healthcare is Judge Posner's feelings on fee petitions themselves. As is often the case, fee petitions are pursued at the tail end of a lawsuit, usually after all the wheat has been separated from the chaff and the merits have been disposed of. In this sense, Judge Posner believes that parties in fee petitions should not engage in an "elaborate inquiry into the state of mind of the party from whom reimbursement of attorneys' fees is sought." Therefore, he would look at objective indicia of exceptionality (or, bad faith, presumably), and determine whether the facts objectively can be shown to demonstrate the use of legal process to heap costs on adversaries.

This is an incredibly important case, for it looks at fee-shifting differently. It requires a court to assess the undercurrent of virtually all competitive litigation: the asymmetry of costs and the use of process itself to achieve something in the marketplace.

ANSYS Suit Against CDNA Finally Ends With No Fee-Shifting (ANSYS, Inc. v. Computational Dynamics North Am.)

If the name of this case sounds familiar, it is because I have written about it on two other occasions, here and here.

In previous discussions about the ANSYS case, I have written about the district court's denial of a preliminary injunction motion concerning Dr. Doru Caraeni's non-competition agreement and the First Circuit's decision to affirm that ruling.

In the last installment of this case, Computational Dynamics unsuccessfully sought attorneys' fees under the New Hampshire Trade Secrets Act bad-faith fee-shifting provision, related to ANSYS' unsuccessful claim for misappropriation. Discovery in this case was staged, which often happens during trade secrets actions. Shortly before the defendants were about to produce their relevant discovery concerning source code, ANSYS decided to voluntarily dismiss the suit.

Computational Dynamics sought fees for the trade secrets claims of nearly $200,000. The district court had little trouble rejecting the argument that ANSYS pursued its claim in bad faith and denied the fee petition. The genesis of the lawsuit was Dr. Caraeni's decision to leave ANSYS and jump ship to CDNA. Just days before his departure, Dr. Caraeni accessed and downloaded highly secret documents related to a comparison of ANSYS' software to CDNA's.

In light of this, the court found it reasonable for ANSYS to pursue claims for breach of a non-compete agreement and trade secrets misappropriation. CDNA's claim for bad faith hinged on the timing of the dismissal (i.e., right before it was to produce documents ANSYS claimed it needed) and ANSYS' failure to identify any true secrets with specificity.

The court's discussion on the latter point was cryptic. It noted two factors. First, it discussed the "highly complicated and sophisticated" nature of the code underlying the software products. Although not really discussed, the court seemed willing to forgive the plaintiff's lack of specificity (at least by the time it decided to non-suit the case). It seems as though the opposite conclusion would make more sense, since plaintiffs with highly technical secrets should have more knowledge of their value.

Second, the court found ANSYS probably determined the cost of proceeding and pursuing its claims was simply too great. I am not sure how convincing this is either. From my vantage point, the court may have been more troubled if ANSYS decided to non-suit the case right after getting CDNA's techincal data, which would have been suggestive of using litigation solely for taking a peek under a competitor's hood.

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Court: United States District Court for the District of New Hampshire
Opinion Date: 2/10/11
Cite: ANSYS, Inc. v. Computational Dynamics North Am., 2011 U.S. Dist. LEXIS 13993 (D.N.H. Feb. 10, 2011)
Favors: Employer
Law: New Hampshire