Consistent with other states that have adopted the Uniform Trade Secrets Act, California law allows the prevailing party in a trade secrets action to seek recovery of its attorneys' fees and costs. If the defendant is the prevailing party, it can recover fees and costs if the court determines that plaintiff brought the lawsuit in "bad faith." A recent California appellate decision, SASCO v Rosendin Electric, Inc., 207 Cal. App. 4th 837 (2012),suggests that trade secret plaintiffs who are unable to elicit strong evidence during discovery run the risk of a "bad faith" determination that could lead to significant attorneys' fees.
The dispute in SASCO began when three senior level employees of SASCO, a licensed electrical contractor, left to work for competitor, Rosendin Electric. Prior to their departure, the employees had been aware of SASCO's plans to bid on a specific business opportunity. When Rosendin ultimately won the bid on that project, SASCO's CEO became convinced that the former employees must have stolen SASCO's trade secrets—including what was allegedly a unique and proprietary computer program for estimating job costs. SASCO sued Rosendin on multiple causes of action, including trade secret misappropriation and unfair business practices.
After a drawn-out battle involving multiple discovery skirmishes, SASCO voluntarily dismissed its suit shortly after Rosendin filed a motion for summary judgment. Rosendin brought a motion for attorneys' fees arguing that SASCO's computer program was not a trade secret and there had been no evidence of trade secret misappropriation, and further accusing SASCO of improperly bringing the lawsuit to harass a competitor. SASCO objected that Rosendin had withheld evidence from discovery. The trial court granted Rosendin's motion, ordering SASCO to pay Rosendin $484,943 in attorneys' fees. The court reasoned that even assuming the computer program qualified as a trade secret, SASCO had improperly brought suit on merely a suspicion that the former employees had stolen trade secrets. The CEO's testimony on this point was particularly damaging. When asked why he believed that his former employees had stolen SASCO's trade secrets, he responded: "Why wouldn't they?"
SASCO appealed the award of attorneys' fees, arguing that the trial court had relied on the wrong standard of evidence and had placed too much reliance on certain facts. The California appellate court upheld the trial court's decision upon concluding that there been an objective lack of evidence supporting SASCO's claims. Notably, the court ignored SASCO's arguments about Rosendin's alleged discovery abuse, reasoning that for purposes of evaluating bad faith under California's trade secret law, the court should not consider why there is a lack of evidence but rather should stick to the evidence presented on the record.
Given the unenforceability of non-compete agreements in California, many employers in SASCO's situation are understandably tempted to pursue a trade secret misappropriation action when they suspect former employees of providing their confidential business information to competitors. Yet this case underscores the importance of conducting a thorough pre-suit investigation before doing so. For example, forensic testing of former employees' computers and interviews of knowledgeable individuals—neither of which SASCO did before filing suit—might elicit sufficient factual support to protect a plaintiff from subsequent liability for attorneys' fees.