Earlier this month, the U.S. District Court for the Southern District of California awarded more than $11 million in attorneys' fees and costs to three trade secret defendants, finding that plaintiffs who had raised a claim of trade secret misappropriation—and also claimed to be the true inventors of the defendants' patents—violated both the Uniform Trade Secrets Act and federal patent rules for exceptional cases warranting sanctions. Both the size of the award and the confirmation that such fee awards are becoming more common in trade secret litigation make this decision newsworthy.
Most state enactments of the Uniform Trade Secrets Act (UTSA) allow an award of defense fees when a trade secret claim has been initiated or maintained in "bad faith." Federal and state courts in California have issued many such rulings since the first in 1989, but the size and scope of awards seem to be on the uptick. This means that would-be trade secret plaintiffs must consider the risk of paying attorneys' fees and costs for initiating or maintaining a baseless trade secret claim.
In Gabriel Technologies Corp. v. Qualcomm Inc., the plaintiffs sued three defendants, alleging that the defendants had breached a confidentiality agreement and misappropriated trade secrets. They also asserted that they had an ownership interest in certain Qualcomm patents and thus sought a correction of inventorship. But the plaintiffs repeatedly failed to identify their alleged trade secrets with the required specificity, faced statute-of-limitations problems, and failed to back up their patent inventorship claims. Moreover, email records suggested that the plaintiffs knew that they had no case but pursued the claims anyway. The plaintiffs also persisted with the case despite explicit judicial warnings.
After the defendants prevailed on summary judgment, they moved for Rule 11 sanctions against the plaintiffs' attorneys, and sought fees and costs from the plaintiffs under the federal statute for exceptional cases in patent litigation and the UTSA statute for bad-faith trade secret litigation. Relying in part on a 2009 decision (FLIR Systems, Inc. v. Parrish) in which Wilson Sonsini Goodrich & Rosati won a $1.6 million fee award for two prevailing trade secret defendants, the district court awarded more than $11 million in fees and costs, and separately sanctioned the plaintiffs' local counsel under Rule 11. The lead attorneys for the plaintiffs reached a settlement with the defendants in the face of a pending sanctions motion against their law firm.
The decision in Gabriel Technologies emphasizes that the bad-faith fee-shifting provision of the Uniform Trade Secrets Act has teeth. It is at least the third major fee award for California trade secret defendants since 2009. It emphasizes that plaintiffs who choose to persist with baseless trade secret or patent accusations can face major monetary sanctions. Further, it shows that attorneys too can be sanctioned under Rule 11 when a client maintains a baseless claim.
The potential availability of attorneys' fees for trade secret defendants in UTSA jurisdictions means that both sides must carefully plan their litigation positions. For would-be trade secret plaintiffs, it is important to make sure that there is a colorable claim of misappropriation, and to distinguish the legitimate goal of intellectual property protection from merely stopping former business partners or employees from engaging in competition. For a trade secret defendant, if an early case investigation shows that the case lacks merit, it is important to put the plaintiff on notice of the defendant's intention to seek attorneys' fees early in the case, and to continually point out the absence of supporting evidence as the case proceeds.
Wilson Sonsini Goodrich & Rosati is actively following developments around the country with respect to fee awards in patent and trade secret cases, and the firm is available to assist companies, employees, newly formed businesses, and investors with every aspect of trade secret litigation and counseling. For more information, please contact any member of the firm's intellectual property litigation or employment and trade secrets litigation practices.