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Attorneys

Attorneys’ Fees For “Bad Faith” Trade Secret Claims: How Pre-Discovery Disclosures Can Help

July 10, 2013

A central issue in all trade secret litigation is the adequacy of a plaintiff’s pre-discovery disclosure of the alleged trade secrets required by California Code of Civil Procedure section 2019.210. Section 2019.210 provides that a plaintiff suing for misappropriation of trade secrets must identify the alleged trade secrets with “reasonable particularity” before commencing discovery. The disclosure requirements of section 2019.210 can also be a valuable tool for a successful defendant seeking attorneys’ fees under the California Uniform Trade Secrets Act (“CUTSA”) for trade secret misappropriation claims brought in “bad faith.” California Civil Code section 3426.4 authorizes the trial court to award attorneys’ fees as a deterrent to specious trade secret claims. (FLIR Systems, Inc. v. Parrish (2009) 174 Cal.App.4th 1270, 1275.) Compelling a plaintiff to disclose the alleged trade secrets with “reasonable particularity” can be the first step in proving “bad faith.”

The purpose of section 2019.210 has been outlined in Advanced Modular Sputtering, Inc. v. Superior Court (2005) 132 Cal.App.4th 826. (See also, Perlan Therapeutics v. Superior Court (2009) 178 Cal.App.4th 1333.) These four purposes include: (1) promoting well-investigated claims and discouraging the filing of meritless trade secret complaints; (2) preventing plaintiffs from abusing the discovery process to learn about defendants’ trade secrets; (3) framing the issues in order to place reasonable limitations on discovery from defendants; and (4) allowing defendants to formulate well-reasoned defenses and not have to wait until the eve of trial. (Advanced Modular, supra, 132 Cal.App.4th at 833-34.

The Perlan court analyzed what has been described as the “’ubiquitous’ problems of litigating the appropriate scope and timing of trade secret identification.” (Id. at 1344.) Plaintiffs rarely provide detailed descriptions of the alleged trade secrets without a court order. They do so for numerous reasons, some more legitimate than others. Plaintiffs do not want to be tied down early in the litigation in the hope of amending or refining their contentions as the litigation and discovery progress. Plaintiffs also have the legitimate concern that, in the event defendants did not successfully misappropriate all their trade secrets, a detailed description in the section 2019.210 statement might somehow be leaked to the public, thereby depriving plaintiffs of the economic value of the trade secret. Conversely, defendants are legitimately interested in tying a plaintiff down early in the litigation for numerous reasons – the first of which was acknowledged by the Court in Advanced Sputtering: “[to promote] well-investigated claims and discourage the filing of meritless trade secret complaints.” (Id. at 833-34.)

A defendant must establish that a plaintiff brought a trade secret misappropriation claim in “bad faith” to obtain an award of attorneys’ fees. The courts have determined that “bad faith” consists of both “objective speciousness of the plaintiff’s claim . . . and . . . subjective bad faith in bringing or maintaining the claim.” (Gemini Aluminum Corp. v California Custom Shapes, Inc. (2002) 95 Cal.App.4th 1249, 1262; see, also, FLIR Systems, supra, 174 Cal.App.4th at 1275.)

The disclosure requirements of section 2019.210 help define whether there was any merit to the claim. “Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.” (FLIR Systems, supra, 174 Cal.App.4th at 1276.) The standards of Code of Civil Procedure section 128.7, subdivision (b) do not apply. Section 128.7, subdivision (b) does not allow sanctions if the plaintiff can establish that, at the time of filing the complaint, there was a belief the allegations would have evidentiary support after a reasonable opportunity to conduct discovery. That is not the definition of “bad faith” under CUTSA.

Accordingly, the plaintiff, to avoid a finding of “bad faith” under CUTSA, must point to some evidence of trade secret misappropriation. It is simply not sufficient to show that the plaintiff believed that, at the time of filing the complaint, discovery would uncover some evidence of misappropriation. The initial disclosures under section 2019.210 help define the alleged secrets to which evidence of misappropriation must pertain.