Monday, June 22, 2009, 6/22/2009 06:03:00 PM

$1.6 Million Bad Faith Trade Secret Defense Attorney Fee Award Upheld in California Appellate Decision

By Todd

Readers of this blog might know that most states have adopted some version of the Uniform Trade Secrets Act's Section 4 regarding attorney's fees: "If (i) a claim of misappropriation is made in bad faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii) willful and malicious misappropriation exists, the court may award reasonable attorney's fees to the prevailing party. " This is California's version: "3426.4. 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 court may award reasonable attorney's fees and costs to the prevailing party. Recoverable costs hereunder shall include a reasonable sum to cover the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the prevailing party."

Law360 is reporting that a California state appeals court has affirmed an award of $1.6 million in attorneys' fees to two former employees of thermal-imaging company FLIR Systems Inc. accused of trade secrets misappropriation when they left to start their own business.

The California Court of Appeal, Second Appellate District, on June 15 agreed that the action was filed and maintained in bad faith within the meaning of the California Uniform Trade Secrets Act.
FLIR suffered no economic harm, and no misappropriation or threatened misappropriation of trade secrets occurred as a result of the two employees' actions, the appeals court said.

“The complaint alleges that appellants suffered 'actual damages' and that respondents willfully and maliciously converted appellants' trade secrets 'with the deliberate intent to injure [appellants'] business,'” Judge Kenneth R. Yegan wrote for the court. “The evidence, however, showed no 'actual damages,' ... and no threat of imminent harm.”

The doctrine of inevitable disclosure is not recognized in California because it contravenes a strong public policy of employee mobility that permits ex-employees to start new entrepreneurial endeavors, according to the appeals court.

The Court of Appeal further pointed out that FLIR did not seek an order compelling the two employees, William Parrish and Timothy Fitzgibbons, to return anything and that the company imposed unnecessary settlement conditions, among other things.

In addition to affirming the original $1.6 million fees award, the appeals court also granted costs and attorneys' fees on appeal in an amount to be determined by the trial court.

The dispute goes back to 2004, when FLIR acquired Indigo Systems Corp., including its intellectual property, for about $185 million.

Indigo sold microbolometers, a device used in connection with infrared cameras, night vision and thermal imaging, whereas FLIR sold the infrared cameras, night vision products and thermal-imaging systems themselves.

Parrish and Fitzgibbons were shareholders and officers of Indigo. After the acquisition, they continued working at Indigo, but in 2005, they decided to start a new company to mass produce bolometers. They officially quit in January 2006.

Originally, Parrish and Fitzgibbons discussed allowing FLIR to participate in their new business plan, but ”FLIR rejected the offer and wished respondents success in the new endeavor,” according to the appeals court.

Soon after, the two entered into negotiations with military contractor Raytheon Corp. to acquire licensing, technology and manufacturing facilities.

“Respondents assured appellants they would not misappropriate Indigo's trade secrets and that the new company would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets,” the appeals court said.

But fearful of the new competition, FLIR sued for injunctive relief and damages in June 2006, claiming that Parrish and Fitzgibbons could not mass produce low-cost microbolometers based on their business plan's time line without misappropriating trade secrets.

On learning of the lawsuit, Raytheon terminated its business discussions with Parrish and Fitzgibbons. But in June 2008, Judge James W. Brown of the Superior Court of California, County of Santa Barbara, entered a final judgment in their favor.

This is a major-league appellate approval of an imposition of bad faith attorney's fee monies. We are going to look for a copy of this decision and will report back any aspect of the reasoning not already covered in the report above.
One question that comes to mind is: why didn't FLIR dismiss its claims against the defendants after it did a little discovery and learned that its claims of misappropriation wouldn't be supported by the evidence? The question is asked because a voluntary dismissal would conceivably deprive the court of jurisdiction and would have stopped the defense fee bleeding that was ultimately incurred in this matter.


Blogger Blake said...

The obvious answer is that by filing the lawsuit, FLIR effectively shuts down Parrish and Fitzgibbons' new venture and forces them to spend money defending themselves while FLIR continued to make way more money than the lawsuit costs them. My question is why the Judge didn't award punitive damages to Parrish and Fitzgibbons!

7:48 PM, June 30, 2009  

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