According to one scholar, “misappropriation of trade secrets” lawsuits are frequently used to crush start up competitors.  (James H. Pooley, The Uniform Trade Secrets Act: California Civil Code 3426, 1 Santa Clara High Tech. L.J. 193 (1985).)  This often occurs when a senior level officer, manager or employee leaves to form his or her own business.  Even though California law overwhelmingly favors competition—and does not require former executives or employees to magically “forget” everything they learned in their former positions— start up competitors are often falsely accused of stealing trade secrets simply because they continue to practice their trade or profession.  Hence the irony:  A tool designed to safeguard competition is often used to crush or destroy it.

There is, however, at least two ways a wrongly accused individual or start up business (aka, the “little guy”) can fight back: i.e., by counter-suing the plaintiff for committing an unfair business practice (a topic for another article) or asking the Court to award his, her or its attorneys’ fees.  

California Civil Code section 3426.4 authorizes such fee awards. 

Under Section 3426.4, courts are required to apply a two-part test.  First, the court decides whether a trade secret misappropriation lawsuit is “objective speciousness”.  Second, it decides whether the lawsuit was brought in “subjective bad faith”.  (Gemini Aluminum Corp. v. California Custom Shapes, Inc., 95 Cal.App.4th 1249 (2002) (“Gemini”).)

To prove objective speciousness, the party accused of stealing need not prove his, her or its innocence.  Rather, “it [i]s enough … to point to the absence of evidence of misappropriation in the record.”  (Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., 236 Cal.App.4th 243, 260 (2015) (“Cypress”), citing SASCO v. Rosendin Electric, Inc., 207 Cal.App.4th 837, 848 (2012) (“SASCO”).)  Put another way, the party claiming its trade secrets were stolen bears the burden of disproving speciousness by producing at least some evidence tending to prove:

  • (1) It owned a bona fide trade secret;
  • (2) The defendant acquired, disclosed, or used that trade secret through improper means
  • (3) The defendant’s actions caused
  • (4)  The plaintiff’s alleged harm or the defendants’ alleged unjust enrichment.

(Civ. Code § 3426.1; Sargent Fletcher, Inc. v. Able Corp., 110 Cal.App.4th 1658, 1665 (2003).) 

To successfully prove it owned a “trade secret,” the party suing must show its alleged secret: 

  • “Derive[d] independent economic value … from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use …”; and
  • “[Wa]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” 

(Civ. Code § 3426.1, subd. (d)(1), (2); CytoDyn of New Mexico, Inc. v. Amerimmune Pharmaceuticals, Inc., 160 Cal.App.4th 288, 296 (2008) (“CytoDyn”).) 

To prove acquisition, disclosure or use by “improper means,” the suing party must prove:

  • “[T]heft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means”; and
  • The defendant’s knowledge or “reason to know” of the same.

(Civ. Code § 3426.1, subd. (a); CytoDyn, 160 Cal.App.4th at 296.)  Proof that an alleged secret was independently developed or “reverse engineered” by the accused refutes this element of acquisition or use through improper means.  (Sargent Fletcher, Inc. v. Able Corp. (2003) 110 Cal.App.4th 1658, 1670 [3 Cal.Rptr.3d 279].)

To prove causation, in most cases the party claiming theft must produce an admissible opinion from a knowledgeable industry expert “based on ‘sound economic proof of the nature of the market and the likely outcomes with [misappropriation] factored out of the economic picture” (Ill. Tool Works, Inc. v. MOC Prods. Co., (S.D. Cal. Aug. 17, 2012) No. 09CV1887 JLS (MDD), 2012 U.S. Dist. LEXIS 116471, *18-20.) showing with “reasonable certainty” the alleged misappropriation was “a substantial factor” in bringing about the alleged damage or unjust enrichment.  (Vu v. California Commerce Club, Inc., 58 Cal.App.4th 229, 233 (1997).)   

Finally, to prove damages or unjust enrichment the party suing must produce non-speculative factual evidence sufficient to establish both the occurrence and extent of the same, albeit not with ‘mathematical precision.’” (Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist., 34 Cal.4th 960, 975 (2004).)

Accordingly, before one business sues another or an ex-employee for stealing secrets it should carefully consider whether it has all the necessary evidence to prove the foregoing “elements” of its case.  If not, it risks not only losing, but having its lawsuit labeled “objectively specious.”

To prevail on the other half of the test, “subjective bad faith,” the accused party need not prove the suing party lacked faith in the merits of its case. “[S]uch a finding [i]s not necessary, because the test is not what the plaintiff believed … but for what purpose it pursued a claim.” (Cypress, 236 Cal.App.4th at 267, citing FLIR Systems, Inc. v. Parrish, 174 Cal.App.4th 1270, 1275 (2009) (“FLIR”); see also, SASCO, 207 Cal.App.4th at 847 [“Subjective bad faith under section 3426.4 means the action was commenced or continued for an improper purpose such as harassment, delay, or to thwart competition.”])  Improper motive can be inferred from the overall circumstances.  Thus, in FLIR former employees who left to start a competing business were awarded their fees for successfully defending against their former employer’s trade secret lawsuit where the former employer offered no non-speculative proof of misappropriation, damages or unjust enrichment, and the employers' settlement demands were unreasonable. 

There are two “take aways” here.  First, suing an ex-employee or other start-up for stealing trade secrets is not without its risks.  Second, wrongly sued ex-employees or competitors should be vigilant in looking for evidence of their opponent’s “true” intent.  If it can be shown that intent was to “bleed” the new competitor or ex-employer “dry” or to scare off would be customers, this could be powerful evidence not only in defending such a case, but in pursuing an award of the wrongly accused’s attorneys’ fees.

Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group