United States: California Court Of Appeals Awards Attorneys' Fees To Defendant For Misappropriation Of Trade Secrets Claim Brought In Bad Faith

A California appellate court recently affirmed the trial court's ruling in Cypress Semiconductor Corporation v. Maxim Integrated Products, Inc. that the defendant ("Maxim") was entitled to attorney's fees under California Civil Code section 3426.4 even after the plaintiff ("Cypress") voluntarily dismissed the action without prejudice. Section 3426.4 awards reasonable attorneys' fees and costs to a prevailing party if a claim of misappropriation of trade secrets is made in bad faith. The appellate court supported its finding on the basis that: (1) Cypress accused Maxim of nothing more, and Maxim did nothing more, than attempt to recruit the employees of a competitor, which Maxim was entitled to do under California law, and (2) Maxim was the prevailing party after Cypress dismissed the suit to avoid an adverse determination on the merits.

BACKGROUND

Cypress and Maxim are competing companies in the field of touchscreen technology. In February 2011, Maxim sought to fill several positions, some of which required experience with touchscreen technology. Maxim hired a recruiter who was given a list of potential candidates from multiple companies. The recruiter exchanged several emails with a Cypress employee who was on the list of potential candidates. In their communications, the recruiter and the Cypress employee discussed the salary of the open position, the employee's touchscreen experience, and whether the employee could recommend anyone else for positions at Maxim.

Following this exchange, Cypress brought an action alleging that Maxim had misappropriated a trade secret by seeking to hire away touchscreen technology specialists. Two days later, Cypress filed an ex parte application for a temporary restraining order prohibiting Maxim from soliciting Cypress touchscreen employees and requiring them to "immediately return all Cypress trade secret and confidential and proprietary information that became known to [Maxim], including specifically any list or roster of Cypress employees working on touchscreen technology." Maxim responded by filing a declaration that a number of Cypress touchscreen specialists were identified using only publically available sources, namely LinkedIn. The court never heard arguments for a restraining order, as the parties stipulated to a 30-day "mutual standstill" in which neither party would solicit the other's employees.

Cypress also filed a motion to seal the declaration made by the employee who was recruited by Maxim, in addition to other information. Maxim opposed the motion by contending the identities of the Cypress employees and their possession of touchscreen experience could not be a protectable trade secret since that information was available from public sources. The court agreed with Maxim and denied the motion. Next, Maxim demurred generally to the complaint and again to the amended complaint.

Before the demurrers were heard, Cypress filed a request to dismiss the action in its entirety without prejudice. Maxim filed a motion for attorney's fees under section 3426.4 based upon Cypress's bad faith filing. The court entered judgment for Maxim in the amount of $180,817.50 plus costs. Cypress appealed this ruling on the basis that Maxim was not the prevailing party, or alternatively, that Cypress did maintain the action in bad faith.

SUMMARY OF RULING

Maxim is the Prevailing Party

Cypress appealed the finding that Maxim was the prevailing party on the basis that the trial court should have applied the standard articulated in Heather Farms Homeowners Assn. v. Robinson, 21 Cal. App. 4th 1572 (1994), which asked whether the party seeking fines "prevailed on a practical level." Applying this standard, the court nonetheless found that Maxim was the prevailing party. The court reasoned that Cypress' apparent purpose in bringing the action was solely to prevent Maxim from engaging in behavior in which they had every right to engage. Since Cypress' complaint was essentially "meritless on its face" and was "based upon theories of liability that were not merely specious, but nonsensical," the court noted that Cypress rightfully lost at every stage of the lawsuit. Lastly, because Cypress dismissed the action to prevent an adverse determination on the merits, it did not gain any legitimate benefit from the action. Accordingly, the court affirmed the trial court's finding that Maxim was the prevailing party.

Cypress Acted in Bad Faith

Next, Cypress appealed the finding of bad faith. Although the California Legislature has not defined "bad faith" for purposes of section 3426.4, "[California] courts have developed a two-prong standard: (1) objective speciousness of the claim, and (2) subjective bad faith in bringing or maintaining the action, i.e., for an improper purpose." FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270, 1275 (2009).

Objective Speciousness

Objective speciousness is present "where the action superficially appears to have merit but there is a complete lack of evidence to support the claim." FLIR Systems, 174 Cal. App. 4th at 1276. Here, the court found objective speciousness by reasoning that Cypress' complaint was "evasive, equivocal, and circumlocutory" and that much of the complaint "consist[ed] of wholly extraneous matter." There was also nothing in the complaint that suggested that Maxim was pursuing Cypress employees for the purpose of obtaining trade secret protected information. Moreover, the court emphasized that a company's mere solicitation of his competitor's employees is not illegal, so long as the inducement is not accompanied by unlawful action.

Therefore, Maxim's conduct was entirely lawful since Maxim did no more than compile a list of employees with touchscreen technology experience without relying upon any internal Cypress information. Maxim further demonstrated that it could identify dozens of touchscreen specialists by searching a single website and patent records. Accordingly, the court affirmed the trial court's finding that Cypress maintained the action in bad faith.

Subjective Bad Faith

Finally, the court affirmed the finding of subjective bad faith given the strong evidence suggesting Cypress brought the claim for the sole purpose of trying to scare Maxim from attempting to hire any of Cypress' touchscreen employees under any circumstances, lawfully or otherwise. Because Cypress clearly brought the action for this improper purpose, the appellate court affirmed the trial court's finding of subjective bad faith.

Accordingly, the appellate court affirmed the judgment for attorneys' fees.

KEY TAKEAWAYS

  • Under California law, it may be difficult to protect the identities and skill sets of employees as a trade secret.
  • Where employees post their job skills on LinkedIn, which is publicly available, or where the employer's LinkedIn page describes those employees and their skills, it may be challenging to show that information is a trade secret.
  • Where a plaintiff dismisses without prejudice a lawsuit in an effort to avoid a motion for bad faith attorneys' fees, the trial court can properly award fees nonetheless.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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