Trade Secret Misappropriation: Sixth District Affirms $1,114,930 Attorney’s Fees Award To Defense For Bad Faith Trade Secret Misappropriation Claim

Court of Appeal Applies Gemini Bad Faith Test Under Civil Code Section 3426.4.

     Civil Code section 3426.4 is a special fee-shifting provision in the trade secret misappropriation area. It authorizes a trial court to make a discretionary award of fees and costs to the prevailing party “if a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists.” The Sixth District recently affirmed a substantial fee award to the defense under the first prong of section 3426.4. We now review that decision.

     In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Case No. H031026 (6^th Dist. Mar. 3, 2009) (unpublished), plaintiff lost a jury trial on a trade secret misappropriation claim. The jury expressly found that the plaintiff made its misappropriation claims in bad faith, a finding endorsed by the trial judge. (As we shall see, this was based on the fact that plaintiff attempted to support its case with forged documents.) Defendants moved for attorney’s fees in a multi-pronged attack: (1) they asked for $1,114,930 in fees under section 3426.4; (2) they requested fees of $782,883.80 under Civil Code section 1717 based on a fees clause; and (3) they requested fees of $1,100,068.75 based on plaintiff’s failure to admit requests for admissions that resulted in substantial expenses in proving the non-admitted facts as true. The trial court granted the fee request of $1,114,930 under section 3426.4.

     Plaintiff appealed, but did not prevail.

     The Sixth District’s unpublished affirmance is a great primer for attorneys wishing to learn the standards governing section 3426.4 fee awards under the “bad faith” trade secret misappropriation statute. “Bad faith,” under section 3426.4, requires a finding of objective speciousness of plaintiff’s claim (rather than frivolousness) and a finding of plaintiff’s subjective bad faith in bringing or maintaining the claim. (Gemini Aluminum Corp. v. California Custom Shapes, Inc., 95 Cal.App.4^th 1249, 1261-1262 (2002); Stilwell Development, Inc. v. Chen, 1989 U.S. Dist. LEXIS 5971 (C.D. Cal. Apr. 25, 1989); accord, Yield Dynamics, Inc. v. TEA Systems Corp., 154 Cal.App.4^th 547, 578 (2007).) Because most of the findings were factual in nature on the bad faith element, the trial court’s findings were reviewed under the deferential abuse of discretion standard.

     Based on this deferential standard, plaintiff had a rough field to plow on appeal—especially given both the jury’s and trial court’s findings of bad faith.

     The objective prong was cemented by the fact that there was evidence suggesting that plaintiff relied upon forged documents in attempting to prove its misappropriation claim. This is a “no no,” with the Sixth District citing to cases in various substantive areas indicating that objective speciousness can be demonstrated by a party’s reliance on forged documents. (See, e.g., Computer Prepared Accounts, Inc. v. Katz, 235 Cal.App.3d 428, 438 (1991) [CCP section 128.5]; Saret-Cook v. Gilbert, Kelly, Crowley & Jennett, 74 Cal.App.4^th 1211, 1229 (1999) [fee award to defense under FEHA justified where plaintiff knew she lied and knew her allegations were false]; Daramola v. Westinghouse Elec. Corp., 872 F.Supp. 1418, 1420 (W.D.Pa. 1995) [Title VII; defense fee award affirmed where the plaintiff fabricated evidence and lied to the court].) Plaintiff tried to obtain shelter from the fact it survived two summary judgment and two nonsuit motions, but no solace was found because the forgeries were snuffed out at trial—which means there is no bright-line rule that a litigant surviving a motion for summary judgment or nonsuit can never be liable for fees. (See Rosenman v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, 91 Cal.App.4^th 859. 866 (2001).)

     The subjective bad faith prong—which means the action or tactic was pursued for an improper motive—can be inferred from circumstantial evidence. Bad faith may be inferred from the objective speciousness of plaintiff’s claim (Stilwell Dev., Inc. v. Chen, supra, 1989 U.S. Dist. LEXIS 5971 at *12.) Plaintiff’s evidence in this case was flimsy, with the jury returning quickly with a determination of no misappropriation. Beyond that, plaintiff did not proffer any direct evidence of its good faith in opposing the defense fee requests, even though “good faith” declarations would have been probative. (Yield, supra, 154 Cal.App.4^th at 579.)

     The end result: plaintiff was liable to defendants for $1,114,930, meaning it is liable for defendants’ fees in litigating a trade misappropriation claim found to have been made in bad faith under section 3426.4.