Bad Faith: Trade Secrets

The existence of a trade secret and wrongful misappropriation are two important elements of a theft of trade secrets claim. The focus here is on the latter, misappropriation.

It is tempting for attorneys to bring trade secret claims, but doing so without good evidence of the wrongful act of misappropriation can result in an ugly award of attorneys' fees if you lose. It is becoming more common to assert trade secrets, but doing so without a sound understanding of what is a trade secret and what is a violation of trade secret law can backfire, and the amount of that backfire can be tremendous. Bring a theft of trade secrets claim without proper support can result in an ugly award of attorneys' fees against you a sanction.


Misappropriation under UTSA includes acquiring trade secrets through “improper means” or using trade secrets of another that were obtained “from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use....”  "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Reverse engineering or independent derivation alone shall not be considered improper means. A.R.S. 44-401

In a recent California case, the plaintiff sued defendants based on the suspicion that they must have misappropriated trade secrets because the individual defendants left the employ of plaintiff to work for a competitor, who subsequently took one of plaintiff's clients. The result? Let's look at the attorney fees statute in the trade secret context:

44-404. Attorney fees
The court may award reasonable attorney fees to the prevailing party for any of the following:
1. A claim of misappropriation made in bad faith.
2. A motion to terminate an injunction made or resisted in bad faith.
3. Willful and malicious misappropriation.

What is "bad faith?" The California courts have said: “[I]n enacting section 3426.4 the Legislature was concerned with curbing ‘specious' actions for misappropriation of trade secrets, and such actions may superficially appear to have merit. We ... conclude that ‘bad faith’ for purposes of section 3426.4 requires objective speciousness of the plaintiff's claim, as opposed to frivolousness, and its subjective bad faith in bringing or maintaining the claim.” ( Gemini, at p. 1262, 116 Cal.Rptr.2d 358.)

Now, that does not help much.  But this does: simply hiring another's employee and taking a client is not enough to support bringing a claim. The California court says " 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, 17 Cal.Rptr.3d 289, 95 P.3d 513.) 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, 64 Cal.Rptr. 486 [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”].)"

An Indiana case (on Illinoislaw) states this more simply: "The appropriate test “requires the party seeking relief to establish both that statements in the pleadings were untrue and that they were made without reasonable cause,” Bouhl v. Gross, 133 Ill.App.3d 6, 88 Ill.Dec. 305, 478 N.E.2d 620, 626 (Ill.App.Ct. 4th Dist.1985) (citation omitted) (construing former 735 Ill. Comp. Stat. § 5/2–611), in light of “circumstances existing at the time of the filing,” Bennett & Kahnweiler v. American Nat'l Bank & Trust Co., 256 Ill.App.3d 1002, 194 Ill.Dec. 929, 628 N.E.2d 426, 430 (Ill.App.Ct. 1st Dist.1993) (citation omitted) (construing Ill. Sup.Ct. R. 137).  Loparex, LLC v. MPI Release, LLC  2012 WL 3065428, 4 (S.D.Ind.) (S.D.Ind.,2012).