Cypress Semiconductor Corporation v. Maxim Integrated Products, Inc.: Court Rules Action Brought in "Bad Faith"

HIGHLIGHTS:

  • In Cypress Semiconductor Corporation v. Maxim Integrated Products, Inc. the California Court of Appeal affirmed a trial court’s award of attorneys’ fees plus costs to Maxim Integrated Products, Inc. as the “prevailing party” in a trade secret misappropriation action brought in “bad faith” by Cypress.
  • The trial court’s bad faith determination was supported by evidence that Maxim did nothing other than recruit employees of its competitor, Cypress, which Maxim was allowed to do under California law because the “inevitable disclosure” doctrine has been rejected by the California courts.
  • This case bears noting because many employers in California use misappropriation of trade secrets as the means to attack a competitor when the competitor acquires one or more of their employees.

In Cypress Semiconductor Corporation v. Maxim Integrated Products, Inc.,1 the California Court of Appeal affirmed a trial court’s award of $180,817.50 in attorneys’ fees plus costs to Maxim Integrated Products, Inc. as the “prevailing party” in a trade secret misappropriation action brought in “bad faith” by Cypress Semiconductor Corporation. Cypress alleged that Maxim misappropriated trade secrets, or was attempting to do so, by soliciting for employment Cypress’ employees specializing in touchscreen technology, an area in which the two companies compete with each other.

In upholding the trial court judgment, the California Court of Appeal held that:

  • The trial court’s findings were without procedural error.
  • The trial court’s bad faith determination was supported by evidence that Maxim did nothing other than recruit employees of its competitor, Cypress, which Maxim was allowed to do under California law because the “inevitable disclosure” doctrine has been rejected by the California courts.
  • Maxim was the “prevailing party” when the trial court impliedly found that Cypress dismissed the suit to avoid an adverse determination on the merits.

The Court of Appeal ultimately concluded that

Cypress filed a complaint that was ... meritless on its face, based upon theories of liability that were not merely specious, but nonsensical. The apparent purpose of the lawsuit was to cow Maxim, and perhaps other competitors, into refraining from conduct in which ... they had every right to engage.2

Factual Background of Cypress

In February of 2011, Maxim sought to fill vacant positions, some of which required experience in touchscreen technology. Maxim hired several recruiters, including an Israel-based recruiter, to assist in finding suitable candidates to fill these vacancies. The Israel-based recruiter directly contacted several Cypress employees, as well as employees of other companies, who specialized in touchscreen technology.

In response, Cypress’ president wrote Maxim’s president, Tunç Doluca, threatening to file suit if Maxim continued to solicit employment of Cypress’ touchscreen specialists. A dispute arose between Cypress and Maxim as to the lawfulness of Maxim’s solicitation of Cypress’ employees. Maxim denied there being interest in obtaining any of Cypress’ trade secrets. When a 14-year Cypress employee accepted an offer for employment at Maxim, Doluca wrote Cypress’ president with an assurance that the employee would not be working with touchscreen technology at Maxim.3

Procedural History

On May 13, 2011, Cypress filed suit against the Israeli-based recruiting company, but Cypress later dismissed the complaint against them. On June 8, 2011, Cypress filed suit against Maxim and Doluca. Two days later, on June 10, 2011, Cypress filed an ex parte application for a temporary restraining order (TRO) prohibiting Maxim and Doluca from soliciting Cypress’ touchscreen specialists and requiring the return of trade secrets as well as confidential and proprietary information.

At the TRO hearing, the parties stipulated a 30-day “mutual standstill” where neither party would solicit the employees of the other. On June 29, 2011, Maxim demanded that Cypress identify the trade secrets at issue and Cypress identified (1) a list of Cypress touchscreen specialists and (2) “substantive confidential information regarding its touchscreen technology.”

On July 11, 2011, Maxim demurred to the original complaint, but on the very last day that Cypress’ opposition was due, Cypress filed an amended complaint, rendering the demurrer moot. Cypress filed a motion to seal certain filings and exhibits claiming that they contained confidential trade secret information, but that motion was denied.

Maxim thereafter demurred to the amended complaint. On Dec. 1, 2015, Cypress filed a request to dismiss the complaint in its entirety without prejudice.

Maxim thereafter brought a motion for attorneys’ fees and costs under California Code of Civil Procedure Section 3426.4. In granting Maxim’s motion, the trial court found that (1) even though Cypress dismissed the case without prejudice, Maxim was the “prevailing party” for purposes of Section 3426.4 and that (2) Cypress brought its trade secrets claim in “bad faith.” Cypress appealed.4

On review, the Court of Appeal focused on two issues in particular:

  1. Was Maxim the “prevailing party” under Section 3426.4?
  2. Did Cypress bring its misappropriation of trade secrets in “bad faith”?

The Trial Court Did Not Err in Finding Maxim Was the “Prevailing Party”

Cypress argued that the trial court applied the wrong standard for “prevailing party” and that the court should have applied the rule under Heather Farms, 21 Cal. App. 4th at 1574, where the question is whether the party seeking fees “prevailed on a practical level.”5

The Court explained that it did not need to answer the question as to the correct standard because the Court was “satisfied that any reasonable finder of fact would be likely to find that Maxim was the prevailing party “on a practical level.” The Court set forth several reasons that Maxim was the “prevailing party:

  • “Cypress filed a complaint that was ... meritless on its face, based on theories of liability that were note merely specious, but nonsensical.”
  • “[T]he apparent purpose of the lawsuit was to cow Maxim, and perhaps other competitors, into refraining from conduct in which ... they had every right to engage.”
  • “[Cypress] ultimately abandoned the action rather than face a determination on the merits that would certainly have been adverse.”
  • Although Cypress argued that it dismissed the claim because its trade secrets would have to be put in the public record, “[n]early all of the information Cypress sought to place under seal had been compiled by its opponent from public sources where – so far as the record shows – it has remained available to this day for anyone with the appropriate subscription to find and peruse.”
  • Although Cypress argued that Maxim did not achieve its litigation objective, “Maxim’s litigation objective, like that of every defendant, was to avoid the imposition of liability.”6

The Court thus concluded that “[t]he only plausible explanation for Cypress’s dismissal of the action is that it feared a determination on the merits.”7

Substantial Evidence Supported the Trial Court’s Finding of Cypress’ “Bad Faith”

The Court provided that although there is no statutory definition of “bad faith” for purposes of Section 3425.4, the “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.”8 The Court found there to be substantial evidence supporting the trial court’s determination that both prongs were met here.

Objective Speciousness

The Court noted that “objective specious is said to be present where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.”9 The Court proceeded to point out the lack of substance in Cypress’ complaint and amended complaint, and stated that “[a]midst such dross the only colorably actionable conduct attributed to Maxim is its attempt, through [the Israeli-based recruiter], to recruit Cypress employees” but that “in the absence of additional liability-producing circumstances, that conduct was entirely lawful.”10

The Court found the complaint deficient in alleging any grounds of liability. The Court explained that Cypress hinted at two theories of liability: (1) that Maxim used trade secrets to identify Cypress’ touchscreen specialists; and (2) Maxim wanted to hire Cypress’ touchscreen specialists to gain access to Cypress’ trade secrets. The Court rejected both arguments, noted that not only were the allegations wholly flawed in alleging such theories, but also that there was no submitted evidence that would prove such theories. The Court stated that “[n]othing in the complaint, and nothing submitted by Cypress since filing the complaint, lends any color to the naked assertion that Maxim was pursuing Cypress employees with the object of extracting trade secrets from them.”11

Importantly, the Court noted Maxim’s suggestion that “Cypress’s claims ... implicitly rested on the doctrine of inevitable disclosure ... [which] will permit a plaintiff to substantiate a trade secret claim ... by demonstrating that [the] defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.”12 The Court, however, dismissed such reliance because the inevitable disclosure doctrine “has been flatly rejected in [California] as incompatible with the strong public policy in favor of employee mobility.”13

The Court thus found substantial evidence supported the trial court’s finding that there was “objective speciousness.”

Subjective Bad Faith

Cypress argued that the trial court erred because it did not make any express findings regarding the “subjective” element of bad faith. The Court rejected that argument because (1) prior case law holds that courts do not need to “state the basis for its decision” when awarding fees and costs under Section 3425.4; (2) even if there were such a rule, Cypress waived the requirement by failing to request such a statement; and (3) the trial court did in fact mention the “subjective” requirement.”14

More importantly, the Court noted that it is “not the case [] that a subjective belief in the merits will bar a fee award where an objectively specious claim is found on substantial evidence to have been maintained for an improper purpose.15

Improper Purpose

The Court held that there was substantial evidence that Cypress brought its claim for an “improper” purpose citing several reasons: (1) “the parties’ pre-suit correspondence supports a reasonable inference that the actuating motive of Cypress’s president Rodgers was to scare Maxim away from attempting to hire any of Cypress’s touchscreen employees under any circumstances”; (2) “Cypress never presented any concrete evidence that any Cypress employee would breach any duty to Cypress by furnishing any of the information [the Israeli-based recruiter] requested”; (3) one of Cypress’ letters “supports an inference that the purpose of the lawsuit was to impose a financial penalty upon, and thereby deter, Maxim’s attempts to hire Cypress technical employees”; (4) “Cypress at no time pointed to any information whatsoever tending to show that Maxim was doing anything more than seek the most qualified candidates for openings in its own enterprise.”; (5) the trial court could properly conclude that Cypress engaged in tactics designed to increase litigation costs.16

Thus, the Court concluded that there was sufficient evidence to support the trial court’s implied finding that there was an “improper purpose.”

What Cypress Means for Employers

This case bears noting because many employers in California use misappropriation of trade secrets as the means to attack a competitor when the competitor acquires one or more of their employees. Although the facts in Cypress are somewhat extreme, the lessons are important nonetheless.

First, Cypress reminds us that while the “inevitable disclosure” doctrine is accepted in certain jurisdictions, it has been categorically rejected by California courts. Thus, companies should not assert trade secret claims based on alleged solicitation/poaching of a competitor’s employees without factual grounds, and at least some evidence, to demonstrate actual misappropriation of trade secrets. Otherwise, suits brought in “bad faith” may very well result in an award of substantial attorneys’ fees plus costs against the offending plaintiff. That is what happened here.

Second, Cypress also teaches that a plaintiff abandoning a “bad faith” claim will not necessarily shield that party from a claim for attorneys’ fees, i.e., there can be a “prevailing party” in the event of a voluntary dismissal – no matter how many reasons the offending plaintiff can conjure up after the filing of a deficient complaint.