Recent Fee Shifting Cases Caution Against Diving into Non-Compete/Trade Secret Litigation Where the Facts Supporting a Violation are Unknown or Questionable

Two recent cases highlight the down side of running into court with guns blazing but without the horses to prevail, or at least without the facts sufficient to survive the bad faith standard of the Uniform Trade Secret Act.  In Sasco v Rosendin Electric, Inc., 143 Cal.Rptr.3d 828 (July 11, 2012), the Appellate Court affirmed the lower court’s judgment of $ 484,943.46 in attorneys’ fees and costs pursuant to California’s Uniform Trade Secrets Act, observing:

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.…..Having reviewed the parties’ respective papers, the court found there was no evidence of trade secret misappropriation.

In Loparex, LLC v. MPI Release, LLC, 2012 WL 3065428 (S.D. Ind., July 27, 2012) the District Court was even more direct in awarding the prevailing party, MPI,  $475,000 in attorneys fees and nearly $29,000 in costs under the Illinois Uniform Trade Secret Act.  The Court found that Loparex pursued the trade secret misappropriation claims in “bad faith.”  The Court also determined there was no evidence that the employees had misappropriated any trade secrets in its diversion of a former Loparex customer.  The Court went on to award fees against Loparex’s former lead counsel as well, under 28 U.S.C § 1927, for bad faith prosecution of the case.

These cases do not mean that attorneys’ fees will be shifted where a plaintiff can show that trade secrets are at issue and the plaintiff has a good faith factual basis to conclude that those trade secrets were being misappropriated or there was a threatened misappropriation.  The plaintiff bringing a trade secrets action does not get assessed the other party’s attorneys fees by losing, but only when the plaintiff loses and a claim of misappropriation is made in bad faith.  In these two cases, there was no reasonable basis for bringing the claims, let alone continuing to pursue the litigation after it was clear to everyone that the plaintiffs’ claims were meritless.

In addition to a statutory basis for attorneys fees under the Uniform Trade Secrets Acts adopted in many states, there are  other statutory fee shifting statutes that may apply.  For instance, Montana’s Declaratory Judgment Act, § 27–8–313, may provide a statutory basis for awarding attorneys’ fees as supplemental relief if such an award is determined to be necessary and proper.  See, e.g., Mungas v. Great Falls Clinic, LLP. 354 Mont. 50, 221 P.3d 1230 (2009)(fees not awarded because the facts not deemed to warrant it).  More frequently, however, fee shifting awards come from a well drafted employment agreement.  Ohio Learning Centers, LLC v. Sylvan Learning, Inc.,  2012 WL 1067668 (D. Md., March 27, 2012).  The Sylvan Court quoted the relevant contract language:

[I]n the event either [SLI] or [OLC] institutes a suit or action to enforce any term or provision of [the License] Agreement, the most prevailing party in the suit or action, or on appeal, shall be entitled to recover from the losing party a reasonable attorney fee to be set by the trial or appellate court in addition to costs or disbursements provided by law.

At the summary judgment phase the Court found the fee award premature because “ at this stage in the litigation it is not yet clear that the Defendants will be ‘the most prevailing party’ in this case.”  Note that the Court is enforcing the parties’ agreement as written.  The Court also noted that the fee-shifting provision in the License Agreement only provides for an award of “reasonable” fees.  And since evidence of the reasonableness of the fees had not yet been submitted by the putative prevailing party, the Court stated that it could not conduct the requisite analysis.

The take away:  make sure you have the horses before filing suit, or at least be reasonably assured you will have those horses harnessed by the time the smoke of your rush to court clears.