A recent decision by California's Fourth Appellate District Court of Appeals highlights the dangers of prosecuting a trade secret case that proves to be unsuccessful -- namely, the possibility that a court may find that the action was brought in "bad faith" because one of the elements necessary for that trade secret claim was missing. While the July 11, 2012 decision, SASCO v. Rosendin Electric, Inc., is rooted in California's version of the Uniform Trade Secret Act (UTSA), (Civ. Code, 3426.4), it is a sobering reminder that a company bringing a trade secrets claim in California may need to have actual evidence of misappropriation to support its claim. (A PDF copy of the opinion can be found below and a hat tip to Dan Westman of Morrison & Foerster for bringing this opinion to my attention).
Facts: SASCO had sued three former senior managers who joined a competitor, claiming that they had misappropriated trade secrets, including certain allegedly proprietary software, for an opportunity that was being pursued by SASCO called the Verizon Trustin Project. After a number of bruising discovery disputes, SASCO was unable to come forward with evidence that the former employees ever misappropriated any trade secrets and it dismissed its claims rather than respond to a motion for summary judgment by the former employees. The employees then sought their attorneys fees, claiming that the action had been brought in bad faith as part of a larger effort to wear them down through litigation.
Holding: The trial court found that SASCO had brought the case in bad faith under California's version of the UTSA. The trial court explained that SASCO's suspicions that its former employees had taken other trade secrets was an insufficient basis for asserting the claim and it faulted SASCO for not conducting a thorough investigation before filing the lawsuit. (SASCO's cause was not helped by the fact that the trial court also believed that the allegedly proprietary software was an "off the shelf" computer program). In light of of the absence of any direct or forensic evidence and affidavits from the former employees that they did not misappropriate the trade secrets, the trial court granted the former employees' motion for attorneys fees and costs, awarding a total of $484,943.46.
On appeal, the Court of Appeals agreed, holding that the trade secret claims were "objectively specious" which it defined as an action that superficially appears to have merit but for which there is a complete lack of evidence to support the claim. Rejecting SASCO's interpretation that only "frivolous" claims warranted a bad faith finding, the Court of Appeals reasoned that there was also ample evidence of subjective of bad faith. Specifically, the Court of Appeals was also influenced by the fact that, in a related litigation between SASCO and one of the employees, a federal district court had awarded approximately $570,000 in attorneys fees and costs against SASCO because that litigation appeared to have been initiated as part of an attempt to wear down the former employees with duplicative and costly satellite litigation in two separate forums. My Concerns: Misappropriation can be one of the tougher elements of a trade secret claim to prove and, as a result, other courts have generally found that circumstantial evidence of misappropriation is sufficient. Indeed, I would argue that circumstantial evidence is often critical in trade secret cases, which by their nature, involve stealth and concealment, making it doubly difficult to prove actual misappropriation. As was perhaps best explained by the U.S. Court of Appeals for the Sixth Circuit in its opinion in Stratienko v. Cordis Corp., 429 F.3d 532 (6th Cir. 2005): "Permitting an inference of use from evidence of access and similarity is sound because 'misappropriation and misuse can rarely be proved by convincing direct evidence.' Eden Hannon & Co., 914 F.2d at 561 (citing Greenberg v. Croydon Plastics Co., 378 F. Supp. 806, 814 (E.D. Pa.1974)). Presented with 'defendants’ witnesses who directly deny everything,' plaintiffs are often required to 'construct a web of perhaps ambiguous circumstantial evidence from which the trier of fact may draw inferences which convince him that it is more probable than not that what the plaintiffs allege happened did in fact take place.' Id. Thus, requiring direct evidence would foreclose most trade-secret claims from reaching the jury because corporations rarely keep direct evidence of their use ready for another party to discover."
Consequently, to the extent that the Fourth District is imposing a duty of direct evidence of misappropriation in all cases, I think it may be imposing an impossible burden on some plaintiffs. If this is the standard, all that a defendant has to do is object or fail to disclose critical evidence and a plaintiff may find itself in a situation that it cannot produce that direct evidence, since evidence of misappropriation is frequently in the hands of the defendant.
The Takeaway? California plaintiffs need to do their homework and would be well served by making sure that they have some evidence of misappropriation before filing an action. While the Fourth District Court of Appeals acknowledges there may be situations where a plaintiff may bring an action in good faith if it reasonably believes discovery may reveal misappropriation, a forensic examination of any devices of departing employees and other proper investigation should be conducted before filing any action. While I am troubled that the Fourth District appears to be imposing an obligation to come forward with direct evidence given the special challenges of proving direct misappropriation, there does appear to be wiggle room in the opinion for future plaintiffs on this point.
Finally, it should be noted that the SASCO decision may be a bit of an outlier, given some of its unique facts (the dismissal of the claim by SASCO and the satellite litigation in federal court which resulted in a similar award of attorneys fees). However, there are a number of cases working there way through the courts involving claims or findings of bad faith against unsuccessful trade secret plaintiffs (see the recent case filed against Latham & Watkins, and most notably, the American Chemical Society v. Leadscope case currently being considered by the Ohio Supreme Court). Therefore, thinking through your trade secret claims and carefully considering the evidence in support of the elements of those claims before filing a lawsuit is more important than ever.
Sasco v Rosendin Opinion.pdf (178.37 kb)
Tags: trade secrets, bad faith, California, SASCO, Rosendin
California | Intellectual Property | IP Litigation | Trade Secrets | Uniform Trade Secrets Act (UTSA)
Hewlett Packard and Oracle's increasingly bitter feud took an unexpected turn last week when HP was forced to backtrack from earlier claims that a former senior executive, Adrian Jones, had improperly backed up files before joining Oracle last March.
HP sued Jones in April, asserting that a month before he left HP he copied "hundred of files and thousands of emails" containing HP trade secrets onto an external hard drive (a copy of the complaint is linked below). Like many high profile trade secret cases, the lawsuit against Jones was accompanied by much fanfare as it followed the highly publicized departure of HP's former CEO Mark Hurd, whom HP also sued for breach of his NDA when he too joined Oracle last September.
HP has now been forced to concede that Jones did not back up his computer with the hard drive in February (Jones' filings and recent letter to the court detailing these concessions can be found at the link above). Instead, HP admits that hard drive was connected to the computer and the files copied in December by HP, which was investigating Jones for ethics violations at that time. According to the Wall Street Journal, HP has acknowledged that the serial number of that hard drive "matches the hard drive used by HP to create an image of Jones' HP-issued laptop on or about December, 21, 2010." HP's forensic investigator said in an email turned over in discovery that he was no longer claiming that a backup occurred and that it was "a dead issue."
As one would expect, Jones' attorneys have demanded that the case be dismissed and threatened to seek attorneys fees against HP for filing a bad faith trade secret action. HP has defended its suit by emphasizing Jones kept and ultimately returned other confidential documents after the lawsuit's filing, contrary to his initial sworn declaration that he did not possess any confidential information.
The lesson for all of us? Verify your critical evidence before you file for a TRO. We all know how quickly important decisions are made in the TRO context and that they are compounded by the stress and emotion that come with these disputes. Nevertheless, if you are relying on one witness' recollection of critical events, drill down and double-check that testimony before filing. Likewise, if you are relying on a single piece of forensic evidence (like the USB device that was described in HP's complaint), take the time to have an outside vendor check and certify what you and your client think you have found. It will reduce, if not eliminate, the risk of finding out later you were wrong and having to explain that to a judge and very unhappy defendant.
HP v Jones Complaint.pdf (765.79 kb)
Tags: Hewlett-Packard, Oracle, Mark Hurd, Adrian Jones, trade secrets, NDA, forensic evidence, TRO, bad faith, back up, hard drive
General | Intellectual Property | IP Litigation | Trade Secrets
Charges of spoliation of evidence are frequently levelled in trade secret cases but rarely result in formal judicial findings of misconduct and sanctions. That may be changing. Last week, on the eve of jury selection, the U.S. District Court for the Eastern District of Virginia in Richmond found that key employees of the defendant, Kolon Industries, Inc., deliberately deleted emails and other evidence and engaged in prolonged efforts to conceal that conduct. The district court has sanctioned Kolon by ordering that an adverse inference instruction will be given to the jury and has awarded DuPont its attorneys fees in connection with the motion. (A special thanks to Mark Klapow for bringing this ruling to my attention). This case has been the subject of significant media coverage already and is shaping up to be the East Coast version of the Mattel/MGA dispute. For the uninitiated, DuPont sued Kolon, a company with its headquarters in South Korea, in February 2009, claiming that Kolon had misappropriated trade secrets relating to the body armor, Kevlar, after Kolon hired a former DuPont employee, Michael Mitchell.
While working with Kolon, Mitchell served as a go-between with other former DuPont employees and he ferried various DuPont trade secrets to Kolon. After DuPont discovered Mitchell's actions, it notified the FBI and Department of Commerce, who then launched their own investigations. Mitchell ultimately pled guilty to theft of trade secrets and obstruction of justice. The Virginia ip Law Blog has a thorough summary of the case, which has generated over 1,200 pleadings and orders. There have been a number of noteworthy rulings that have garnered commentary, ranging from rulings relating to the viability of Kolon's antitrust claim against DuPont to a recent decision finding the Department of Justice and DuPont did not improperly collude in connection with subpoenas used to gather evidence for the prosecution.
Not surprisingly, given the scope of this case, the July 21, 2011 Order (a link for which is below) is not light reading and spans 91 pages. After finding misconduct by a number of key employees, the district court declined to enter a default against Kolon because of two relatively prompt litigation holds and because the company itself had not systematically engaged in the misconduct. Nevertheless, the district court did find that a number of key employees who interacted with Mitchell deliberately, willfully and in bad faith deleted a substantial amount of emails immediately after the filing of the complaint; it further found that they also set upon a course to conceal their conduct from the court and DuPont. Balancing the fact that many of the emails were recovered while many others were not, the court found that there was more than adequate grounds for a spoliation jury charge.
On these facts, the district court concluded that the best remedy was "to inform the jury that certain Kolon executives and employees, after learning that DuPont had sued Kolon, deleted much electronically stored information that would have been available to DuPont for use in presenting its case." The district court further held that the "jury then should be allowed to infer that the recoverable deleted information would be helpful to DuPont and harmful to Kolon." Finally, the district court ordered that "jury should be told that the fact of deletion, without regard to whether the deleted material was recovered, may be taken into account in assessing the element of Kolon's intent and knowledge" (Opinion at pp. 87-88).
The takeaway? Litigation holds may provide a corporate defendant with some protection but there needs to be follow through within the company to ensure that the litigation hold is not only distributed to the appropriate employees but that it is also followed by those employees. Special care may also need to be taken with key employees located outside the U.S., who may not be as familiar with the severe consequences of preserving email and other electronic information in U.S. litigation.
DuPont v. Kolon Spoliation Order.pdf (2.24 mb)
Tags: Spoliation of evidence, bad faith, deleting emails, DuPont, Kolon Industries, trade secrets, criminal, Michael Mitchell, FBI, litigation hold, destruction of evidence
DuPont v. Kolon | Intellectual Property | IP Litigation | International | Trade Secrets
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