Illinois Appellate Court Upholds Sanctions Against Radio Advertiser For Bad Faith Trade Secrets Claims
The recent case of Multimedia Sales & Marketing, Inc. v. Marzullo, et al., — N.E.3d —-, 2020 IL App (1st) 191790 (1st Dist. Dec. 21, 2020), demonstrates the peril that attorney fees sanctions present for litigants who bring trade secret misappropriation claims in bad faith.
Like the federal Defend Trade Secrets Act, the Illinois Trade Secrets Act (“ITSA”) allows litigants to recover attorneys’ fees incurred in defending “bad faith” misappropriation claims. See 18 U.S.C. § 1836(b)(3)(D); 765 ILCS 1065/5. Illinois courts interpret claims of bad faith in conjunction with Illinois Supreme Court Rule 137—an analogue to Federal Rule 11 that obligates Illinois attorneys to only bring actions that are well-grounded in fact, warranted by existing law (or a good-faith argument for the extension, modification, or reversal of existing law), and not for an improper purpose. Section 5 of ITSA complements Rule 137’s obligations and provides a mechanism for courts to penalize claimants who bring vexatious and frivolous trade secrets actions.
The Marzullo decision arose from a familiar set of facts in trade secrets litigation. The plaintiff, Multimedia Sales & Marketing, Inc. (“MSM”), sued a competitor in the radio advertising business—Radio Advertising, Inc. (“RAI”)—and three former employees who left MSM to work for RAI. MSM alleged the former employees improperly took MSM’s potential customer lead lists (or renewal lead lists) and used the lists to solicit MSM’s customers. MSM claimed the lists were protectable trade secrets under ITSA, but the trial court disagreed and granted summary judgment in favor of the defendants. Specifically, the trial court found that (1) the renewal lead lists did not qualify as a trade secret under ITSA, and (2) the lists were not “secret” because MSM shared them with radio stations. The trial court also granted defendants’ Section 5 motion for attorneys’ fees and awarded them $71,688 in fees.
MSM appealed the trial court’s merits decision and the fee award. In a Pyrrhic victory for MSM, the Illinois Appellate Court reversed the trial court, in part, and held the renewal lead lists were eligible for trade secret protection because they contained customer names, telephone numbers, purchase histories, and pricing information. But the Appellate Court agreed the misappropriation claim failed because “MSM provided the names of its customers to radio stations, which then broadcast that information and were otherwise free to use it without restrictions.” 2020 IL App (1st) 191790, at ¶ 27. These facts established MSM did not keep its customer information secret, and the Appellate Court affirmed summary judgment in defendants’ favor.
The Appellate Court also affirmed the $71,688 attorneys’ fee sanction against MSM. Applying the deferential “abuse of discretion” standard of review, the Appellate Court found “MSM admitted to providing material information about its customers to radio stations without requiring the stations to sign confidentiality agreements and knowing the radio stations would air the customers’ information or otherwise disclose it.” Id. ¶ 32. Agreeing that MSM’s trade secrets claims were not well-grounded in fact or law, the Appellate Court concluded the trial court’s ‘bad faith’ finding did not constitute an abuse of discretion. The Appellate Court did, however, deny defendants’ motion for attorneys’ fees incurred on appeal. Id. ¶ 34.
The cautionary lesson of Marzullo is straightforward: A trade secrets claim predicated on alleged misappropriation of demonstrably public, non-secret information likely qualifies as a “bad faith” claim under Illinois law. MSM learned this lesson the hard way, but other litigants should learn from its mistake. Before bringing an ITSA claim, a potential plaintiff should always ensure it has taken sufficient measures to keep its alleged trade secrets “secret” and unavailable to the public at-large. At the same time, Section 5’s attorneys’ fees provision provides defendants in ITSA cases with a worthwhile incentive to defend frivolous claims all the way to final judgment.
Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe. A potential victim of trade secret theft, or the accused, should swiftly consult experienced litigation counsel.