It is sometimes difficult to distinguish arrogance or hubris from their close cousin, courage and perseverance. When a Court looks back over a plaintiff’s unsuccessful prosecution of a trade secret case for purposes of determining an award of attorney’s fees, that postmortem evaluation of the plaintiff’s case can make for some disturbing reading.
Recently, in Aerotek v. The Johnson Group Staffing Co., the Sacramento Superior Court awarded a successful defendant in a trade secret misappropriation and unfair competition case more than $730,000 in attorney’s fees. In doing so, the Court increased the fees incurred by Defendant by 33%. While that is notable by itself, just as notable is the Court’s analysis that resulted in the award.
In cases brought under the California Uniform Trade Secret Act (“CUTSA”) a Court may award reasonable attorney’s fees and costs to a prevailing defendant “if a claim of misappropriation [of trade secrets] is made in bad faith.” (Cal. Civil Code Section 3426.4) In deciding that the bad faith standard had been met, the trial court examined the plaintiff’s motivations as evidenced by the procedural history of the case, the conduct of plaintiff’s counsel, and the settlement discussions between the parties. The decision (which is very recent and may still be appealed) provides a useful insight into how a party’s litigation tactics may be viewed by a court at the termination of a case.
Aerotek is a staffing agency that recruits and places employees and contract workers with businesses. Michael Ponce (“Ponce”) was an Aerotek employee who served as both a recruiter and a sales person. In the course of his employment, Ponce signed a noncompete agreement where he agreed that he would not divulge Aerotek’s trade secrets which were defined to include Aerotek’s customer list (a section of the Business and Professions Code defines customers of such staffing agencies as trade secrets) and to not solicit any of those customers following the termination of his employment at Aerotek. Chris Johnson was also a former Aerotek employee but had left sometime before the lawsuit was filed to start his own personnel recruiting and placement company, The Johnson Group (“TJG”). Ponce left the employ of Aerotek and eventually went to work for TJG as a recruiter and sales person charged with generating new employer accounts.
Aerotek sued both Ponce and TJG. The case was tried twice. The first jury found misappropriation of Aerotek’s trade secrets but determined that defendants had not caused plaintiff to suffer any damages. It also found that Ponce had breached his contract with Aerotek. All parties filed new trial motions. At the second trial, the jury found no misappropriation of any Aerotek trade secrets. The defendants moved the Court for an award of attorney’s fees under CUTSA.
The “bad faith standard” imposed by CUTSA to award attorney’s fees is a high one. In deciding the motion, the Court relied on a 2009 court of appeals case, FLIR Systems, Inc. v. Parish, 174 Cal.App.4th 1270, 1275-1278 to understand and apply that standard. Citing FLIR, the trial court held that bad faith requires not only that the claim be “objectively specious” but also that the plaintiff brought or maintained the claim in subjective bad faith — that is with an improper motive.
In deciding that the plaintiff’s misappropriation claim was brought in bad faith, the Court noted, among other things, the following:
- Aerotek’s failure to seek injunctive relief at the outset of the litigation. In what may usefully serve as a lesson to plaintiffs in trade secret cases, the Court concluded, “if the trade secrets had any significant value, or if [Aerotek] believed such were in imminent danger of loss, Aerotek should have sought immediate protection.”
- Lack of customer loss. The Court found it notable that neither Aerotek management nor its counsel sought out the customers in question to inquire as to the exact nature of the contact by defendant Ponce by conducting official interviews, obtaining affidavits, or taking depositions.
- Aerotek’s settlement conduct. The Court characterized Aerotek’s settlement conduct as unreasonable. “As Aerotek’s case got weaker, either due to the failure to find favorable evidence or the appearance of adverse evidence, including losing against TJG at the first trial, its settlement demands got larger not smaller.” The Court also found notable Aerotek’s demand to include a “hands off” list as a part of settlement which listed customers that Aerotek had either never done business with or had done business with only distantly, or were TJG’s existing customers.
- Maintaining the lawsuit well after Aerotek knew or should have known that the customers it was attempting to exclude from defendants had little or no business of any economic consequence to either Aerotek or TJG – meaning that its damages, assuming it could prove liability, would be insignificant.
- The Court concluded that both the merits of the case and the settlement history evidenced that Aerotek had an anti-competitive motive in filing the lawsuit. This conclusion was, in the Court’s view, supported by the lack of the objective merits to the case and Aerotek’s settlement demands. In determining that Aerotek had acted in subjective bad faith, the Court looked at the amount of attorney’s fees incurred in the case, the relative simplicity of the case when considered in light of the litigation history of the case which included “vast numbers of motions brought both in law and motion and in the trial court” largely for “nonsubstantive issues.” The Court concluded that that litigation history “in the absence of the kind of meaningful discovery or other helpful fact gathering, speaks further to a pattern of conducting expensive proceedings for their own sake, without a commensurate effort to pursue productive preparation of the case.”
The Court then applied a lodestar analysis, taking the base amount of attorney’s fees claimed by defendants of more than $553,000 and determined whether or not a multiplier was appropriately applied to that number. The Court applied the multifactor test common to a lodestar analysis which includes, among other things, the novelty and difficulty of the questions involved; the skill displayed in presenting them; the extent to which the nature of the litigation precluded other employment by the attorney; and any risk, contingency or delay in payment of attorney’s fees. These factors weighed against plaintiff. The Court also noted that the fact that one law firm had agreed to take the case on a contingency basis when its client had run out of money was a notable factor in justifying its decision to award a 33% increase in defendants’ attorney’s fees.
It appears that Aerotek has appealed the underlying judgment.