California Courts Continue the Trend of Punishing Plaintiffs Who Bring UTSA Claims Based on Mere Suspicions

You know the scenario well.  A valuable employee leaves a company to work for a competitor.  The former employer is incensed and feels betrayed.  “How could this loyal employee have left?  I raised him from a pup.  Why did we not see this coming?” 

The emotional questions are then followed by the competitive considerations: “What will she do when she starts working for our biggest competitor?” “ Will the competitor obtain any of our “secret” information and enjoy a competitive advantage? “

While this scenario is common and the questions reasonable, it is important for the spurned employer to pause before rushing off to the courthouse to file a lawsuit.  California courts have signaled an increased level of concern about lawsuits brought under the California Uniform Trade Secrets Act (Cal. Civ. Code Sec. 3426) (“UTSA”) which are filed in bad faith on the mere suspicion that the ex-employee is violating his or her obligations to the former employer.  These lawsuits are often fueled by resentment and the desire to cause the former employee or a competitor heartburn and obtain a competitive advantage.  While legitimate trade secret claims serve an important purpose, the theory can easily be abused and undermine important public policies in favor of free competition and employee mobility.

The latest decision on this issue was handed down by the Fourth Appellate District, Division Three, last month.  In SASCO v. Rosendin Electric Inc., the Court of Appeal affirmed Orange County Superior Court Judge Charles Margines (in my view, is one of the best Judges on the Orange County Superior Court bench) who granted a motion for $484,943.46 in attorney fees and costs in favor of the defendants who were the ex-employee and their new employer.

Cal. Civ. Code Sec. 3426.4 which allows a party to obtain its reasonable attorney’s fees and costs if a trade secrets claim is made in bad faith.  The SASCO court confirmed that the standard of “bad faith” in the context of the UTSA is different that the rather high standard that applies under a Cal. Code of Civ. Pro. Section 128.7 analysis.  Section 128.7, (the “California Rule 11”) generally provides for attorney fees and costs where a lawsuit is brought without a reasonable belief that the factual contentions have evidentiary support or are likely to have evidentiary support after a reasonable opportunity to conduct discovery.  The good faith standard under the UTSA is much lower and involves considerations of subjective bad faith.  The Court concluded:

There is no evidence in the record supporting the claim that defendant misappropriated SASCO’s trade secrets. Defendants were not required to conclusively prove a negative (i.e., that they did not steal SASCO’s trade secrets). Instead, under the “objectively specious” standard, it was enough for defendants to point to the absence of evidence of misappropriation in the record. It was perfectly legitimate for Rosendin to hire the individual defendants and for the individual defendants to leave the employ of SASCO in favor of a competitor, Rosendin. (See Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1149.) Speculation that the individual employees must have taken trade secrets from SASCO based on their decision to change employers does not constitute evidence of misappropriation. Nor does speculation that Rosendin’s success in obtaining the Verizon Tustin contract was based on the theft of trade secrets constitute evidence of misappropriation. (King v. Pacific Vitamin Corp. (1967) 256 Cal.App.2d 841, 850 [Intent to “take away some of plaintiff’s business did not prove their actions to be wrongful. There is virtue in fair competition in business even though a competitor is hurt”].) Having reviewed the parties’ respective papers, the court found there was no evidence of trade secret misappropriation. (Emphasis added.)

The SASCO court extensively cited the FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009) decision from a few years back.  The FLIR case affirmed an award $1.3 million in costs and fees to the successful defendants. 

Now the FLIR saga has a sequel.  Earlier this year, those some employees brought an action against Latham & Watkins LLP in Los Angeles Superior alleging malicious prosecution.  (See Parrish v. Latham & Watkins LLP, Los Angeles County Superior Court Case No. BC482394.)  The Parrish v. Latham & Watkins LLP case will be closely watched to determine the degree to which law firms can be secondarily liable after their clients have been held liable for filing a UTSA lawsuit in bad faith.  The plaintiffs in the new case contend that, as a result of the lawsuit, plaintiff’s entire business plan was scuttled including its relationship with a aerospace company which terminated an agreement with them.

A WORD TO THE WISE . . .

The takeaway from this development in California law is to proceed with great care and caution when considering whether to bring a claim for violation of the UTSA against a former employer.  The atmospherics of the situation are often filled with resentment compounded by fear that a competitive edge will be lost when talent walks out the door.  Resist the temptation to file a lawsuit based on a mere suspicion.  If there is a basis for a suspicion, consider sending demand letters and engaging in a dialogue with the former employee and his or her new employee.  These communications may either confirm those suspicions or reveal that there is no basis for legal action.  Remember, California is a pro-employee state which strongly favors the right to free and open competition and employee mobility.