Trade secret litigation aimed at chilling the free mobility of employees is an all too common occurrence, particularly in hot markets like the technology sector. Even the most frivolous of cases can cost defendants tens, if not hundreds, of thousands of dollars or more in defense costs. A recent California appellate decision should help deter the filing of such improper and harassing litigation. California’s Sixth Appellate Court of Appeal recently upheld the Santa Clara County Superior Court’s award of attorney’s fees plus costs against plaintiff, Cypress Semiconductor Corporation, for filing a trade secret misappropriation claim against its competitor, Maxim Integrated Products. Cypress Semiconductor Corp. v. Maxim Integrated Prods., Inc., 236 Cal. App. 4th 243 (2015). Specifically, the appellate court affirmed the attorney fee award under the California Uniform Trade Secrets Act (CUTSA) after the plaintiff voluntarily dismissed the suit without prejudice prior to a pleadings challenge. Under CUTSA, the prevailing party may recover defense costs when a plaintiff brings a trade secret misappropriation claim in bad faith. Cal. Civ. Code § 3426.4.
While the California Legislature has not defined “bad faith,” California courts routinely apply a two-prong test that requires (1) objective speciousness of the claim, and (2) subjective bad faith in filing the claim. In this case, plaintiff, Cypress, alleged that its competitor was targeting its employees for the purpose of misappropriating proprietary information. The appellate court found Cypress’s trade secret claim easily met the test for bad faith. It determined that Cypress filed the claim solely to intimidate and “cow” its competition into refraining from engaging in entirely lawful conduct. It further held Cypress’s complaint was meritless, relying on mere “naked assertions” rather than well-plead facts and asserting “nonsensical” trade secret theories that included claiming publicly available information was confidential. The manner in which the litigation was pursued also appears to have influenced the decision. Cypress delayed identifying its trade secrets for months and ultimately dismissed the case in the face of a pleadings challenge rather than face an adverse determination on the merits.
It was clear to the appellate court that Cypress filed the trade secret claim in an attempt to shut down or interfere with its competitor’s entirely lawful recruiting activities based on an inevitable disclosure doctrine, which has been roundly rejected by California courts. The lessons taught in Cypress Semiconductor remind would-be trade secret plaintiffs to carefully consider filing trade secret claims in light of the CUTSA’s bad faith standard.