Thursday, 7 August 2014
Curbing Frivolous Trade Secret Claims and a $147.5 million Trade Secret Settlement to the Alleged Misappropriator
You know the stories. Company X and Company Y decide to explore partnering together. Company X shows Company Y its trade secrets. Company Y decides not to partner with Company X. A short time thereafter, Company Y releases a product apparently including/using Company X’s trade secrets. Company X sues Company Y. Or maybe, Company X has three employees leave to join competitor or set up shop as a competitor. Company X sues the three employees and the competitor. These situations happen all the time and many of the cases are meritorious. However, we all know that sometimes trade secret suits are frivolous and are primarily motived by a desire to slow or knock a competitor out. There is nothing like making a competitor, particularly if it is a company with less resources than your client company, eat attorney fees and expenses, and use up lots of company personnel time dealing with the suit. And, why not try to disrupt a competitor’s relationships with third parties by sending the third parties copies of the complaint and papers concerning a preliminary injunction/temporary restraining order. (Sure, you are just trying to help them not be misappropriators.) You know, this also looks like a matter criminal prosecutors should look into—let’s get them involved as well. Heck, who does not want to spend some time using discovery to snoop around a competitors business—“you took my trade secret that I just discovered that you were using.” (of course, you shouldn't take those actions, unless . . .) In California, we have a law designed to attempt to curb those types of suits: California Code of Civil Procedure 2019.210. Section 2019.210 provides:
In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act . . ., before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code
Under the Code, the party alleging trade secret misappropriation must file a 2019.210 statement before beginning discovery. I am sure many would complain that 2019.210 does not protect companies from frivolous (anticompetitive) suits enough. (I would be in that camp.) And, there are many frivolous trade secret suits that proceed anyway. (Moreover, abuse of process or malicious prosecution actions in California tend not to be too helpful.)
Corporate Counsel has recently reported about a trade secret case between Eaton and Triumph Group that has piqued my interest. The case has facts similar to many trade secret cases—employees depart to competitor and trade secret suit is filed. However, here, after 10 years of litigation, the party who brought the trade secret misappropriation claim is paying the defendant (alleged misappropriator) $147.5 million to settle the case. That’s right. The alleged misappropriator is getting $147.5 million. Wow. Interestingly, the trade secret action appears to have some merit—although I doubt the plaintiff knew that for certain when they filed the action—because numerous documents of plaintiff’s were found with the defendant during a later criminal investigation. Whether the documents contained trade secrets, or merely information readily accessible, already possessed by the defendant or in the public domain is another question. The defendant’s counterclaims included allegations that plaintiff’s trade secret claims were “exaggerated.” Notably, plaintiff’s conduct in the litigation allegedly was very poor and perhaps would make the plaintiff look very, very bad in front of the jury. The conduct is described by Corporate Counsel, here. Triumph Group’s (the alleged misappropriator) press release concerning the settlement is here. Do you have any leads to other statutes or regulations designed to curb or punish frivolous trade secret law suits? Have you heard of any other apparently egregious cases like this one?