United States: Employer's Action For Misappropriation Of Trade Secrets Against Former In-House Counsel Who Engaged In Competitive Activities Not Subject To Anti-SLAPP Motion

There are indeed limits to the reach of the anti-SLAPP statute, particularly in the trade secret context.  In West Hills Research and Development, Inc. v. Terrence M. Wyles, a California appellate court ruled that engaging in activity to set up a competing business is not protected activity under the anti-SLAPP statute.

Summary of the Case

West Hills, a medical products company, terminated Wyles, its in-house IP attorney, after discovering he was attempting to set up a competing business with trade secrets he allegedly acquired from West Hills.  West Hills sued Wyles for misappropriation of trade secrets, intentional interference with economic advantage, negligent interference with economic advantage, computer fraud and abuse, conversion, breach of loyalty, breach of confidence, and unfair competition.  West Hills alleged that Wyles had improperly taken documents containing trade secrets, and confidential and proprietary information.

Wyles denied accessing any trade secret information and claims he only took documents that were relevant to a derivative shareholder lawsuit that he contemplated bringing against the company.

The Anti-SLAPP Motion. Wyles moved to dismiss the complaint based on the Strategic Lawsuit against Public Participation (SLAPP) statute codified in California Code of Civil Procedure Section 425.16.  The statute permits the court to strike a "cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech." C.C.P. § 425.16(b)(1).  The court focuses on the "principal thrust or gravamen" of the complaint.

Wyles' anti-SLAPP motion was premised on his claim that West Hill's officers embezzled money, engaged in tax fraud, and other financial malfeasance. Wyles argued that his conduct constituted pre-litigation communication and was therefore protected under Civil Code Section 47(b).

West Hills convinced the court that Wyles had in fact taken trade secrets belonging to West Hills, and that Wyles used that information to try to form a competing business.  West Hills presented evidence that Wyles attempted to recruit West Hill's consultant to join the new company.  Wyles told this consultant that his competing company would "take over" West Hills' business and patents.  The consultant also saw agreements between Wyles' new company and West Hills' competitors.

West Hills also identified the following trade secret documents in Wyles' possession: a confidential business plan, privileged and confidential drafts of a patent application, a confidential technical product description, and confidential agreements with potential partners.

The trial court denied Wyles' motion, and Wyles appealed.

The Appeal. Applying de novo review,  the California Court of Appeal, Second District, held that Wyles did not meet his burden of showing that West Hill's claims were actually based on his intention to file a derivative action.  Instead, the gravamen of West Hill's complaint was Wyles' improper access and use of West Hill's trade secrets to form a competing venture.

The court focused its attention on the evidence submitted by the parties.  Wyles did not deny taking trade secret information, rather he insisted that the documents supported his embezzlement claims against the company.  The court found that these documents were not germane to the contemplated shareholder derivative lawsuit.

Competing Conduct Is Not Protected Activity. The court distinguished privileged pre-litigation communications from competitive conduct.  The court also acknowledged that the anti-SLAPP statute recognized pre-litigation communications that are encompassed by the litigation privilege under Civil Code Section 47(b).  However, the court rejected Wyles' argument that he had engaged in such protected activity.  The court noted that the litigation privilege extended to communications, not conduct.  Thus, the privilege applied to a statement Wyles made to a West Hill investor concerning the alleged financial malfeasance.  But, the privilege did not apply to Wyles' activities in furtherance of establishing a competing business.

Takeaway

The anti-SLAPP statute was intended to protect the public's participation in government, in particular speech protected by the First Amendment.  Indeed, courts generally give credence to anti-SLAPP motions where speech is involved.  In the trade secret context, an anti-SLAPP motion can be successful when it involves purported defamatory speech or communication.

Therefore, a critical factor to fend off an anti-SLAPP motion appears to be defendant's competing activity or conduct, and not speech.  West Hills alleged that Wyles engaged in competing activities.  It supported those allegations with evidence which  unequivocally demonstrated Wyles acted for his own financial gain, rather than communicating or making statements for purposes of bringing a shareholder derivative action.

A company wishing to protect its trade secrets should highlight conduct demonstrating the defendant's use of the trade secret.  This, however, can present an obstacle for many plaintiffs at the onset of litigation.  Since most anti-SLAPP motions are brought before discovery commences, a company may not always have sufficient evidence of competing conduct by the defendant.

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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