Judge William Alslup of the Northern District of California recently awarded fees to CloudFlare, Inc. (CloudFlare), a defendant in a trade secret misappropriation case under, in part, the relatively new Defend Trade Secrets Act (DTSA). Swarmify Inc. v. CloudFlare Inc., No. C 17-06957, WHA (N.D. Cal. Sept. 28, 2018).
The dispute in Swarmify was in regard to tech start-up Swarmify's trade secrets allegedly stolen by CloudFlare. The trade secrets – allowing for faster, more efficient video streaming – were revealed under non-disclosure agreements during failed acquisition and licensing discussions between the two video streaming companies. Months later, CloudFlare posted two blog articles outlining its new video streaming solution. In its preliminary injunction motion, Swarmify alleged that these articles demonstrated that CloudFlare's new streaming solution was developed using Swarmify's confidential information, including its trade secrets. In denying the motion, the Court expressed uncertainty regarding the claims, stating "Swarmify's attempts to set up its purported trade secrets as elusive moving targets do not bode well for the merits of its claims."
Fast forward four months and Swarmify voluntarily dismissed its suit, with prejudice. Shortly thereafter, CloudFlare filed a motion seeking its fees incurred between the denial of the preliminary injunction motion and the voluntary dismissal pursuant to the DTSA, California Uniform Trade Secrets Act and the Courts' inherent powers. The court applied the two-pronged "bad faith" standard under the DTSA: (1) objective speciousness and (2) subjective bad faith in bringing or maintaining the claim.
Ultimately, the Court determined that Swarmify should have dismissed the case after the parties' mediation which occurred after the preliminary injunction denial. According to the Court, CloudFlare presented new facts at the mediation that "unquestionably rendered Swarmify's misappropriation claim objectively specious." It was at that point that Swarmify was "ethically obligated to drop its misappropriation claim," not after the denial of its preliminary injunction motion. The Court took issue with Swarmify's "attempt to settle (and thus extract some gain from Cloudflare) before offering to freely dismiss the case." Based on this improper litigation approach, the Court awarded fees and costs to CloudFlare.
As statistics have shown, trade secret actions are on the rise since the enactment of the DTSA, a statute designed to make it easier for parties to bring trade secret actions in federal court. This opinion is a stern warning to the increased number of trade secret plaintiffs of the risk of attorneys' fee awards if it is determined their cases lack the necessary merit at any time and they continue litigating their claims.