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“Animosity” Is Not Bad Faith For Attorneys’ Fees In Trade Secret Cases

Posted in Trade Secrets

By James Kachmar

Under the California trade secret statute, the court may award attorneys’ fees where there has been a willful and malicious misappropriation of plaintiff’s trade secrets or when a trade secret misappropriation claim is brought in bad faith.  (See Civil Code §3426.4.)  In Weco Supply Company, Inc. v. Sherwin-Williams Company, 2013 U.S. Dist. LEXIS 1572 (January 3, 2013), a district court in the Eastern District of California, revisited the issue of what constitutes “bad faith” for purposes of awarding attorneys’ fees in trade secret cases.

Weco and Sherwin-Williams had entered into a “jobber” agreement by which Weco would distribute Sherwin-Williams paint products.  Weco alleged that Sherwin-Williams breached the jobber agreement by discontinuing certain of its product lines and then dealt directly with some of Weco’s end customers.  In addition to breach of contract claims, Weco asserted a claim for trade secret misappropriation against Sherwin-Williams.  Weco argued that its pricing arrangements with its end users were trade secret and were misappropriated by Sherwin-Williams to deal directly with these customers.  The court eventually granted Sherwin-Williams summary judgment against Weco as to its trade secret misappropriation claim and found that “the undisputed facts showed that Weco’s pricing to end users and cost of acquisition were not trade secrets” under California law.  Thus, the court found there was no misappropriation and dismissed Weco’s trade secret misappropriation claim.

 

Following the granting of summary judgment, Sherwin-Williams moved for an award of attorneys’ fees claiming that Weco’s trade secret misappropriation claim had been brought in bad faith.  The court began by recognizing that a party seeking an award of attorneys’ fees under Civil Code section 3426.4 must satisfy two elements:  “(1) the objective speciousness of the opposing party’s claim and (2) the subjective bad faith of the opposing party in bringing or maintaining the action that is an improper purpose.”  The court reasoned that “objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.”  As to the second prong, “subjective bad faith may be inferred by evidence that [a party bringing an action for trade secret infringement] intended to cause unnecessary delay filed the action to harass [the opposing party] or harbor improper motive.”

The court agreed with Sherwin-Williams that it satisfied the first element by showing that Weco’s trade secret misappropriation claim was objectively specious because of plaintiff’s failure to produce evidence in opposition to Sherwin-William’s motion for summary judgment.  This demonstrated that it lacked evidentiary support.

However, the court found that “bad faith” under California’s trade secret misappropriation law “means more than the simple inability to provide the necessary elements of a cause of action.  The second prong of the test requires a showing of subjective bad faith.”  Sherwin-Williams pointed to evidence in the deposition of Weco’s principal that he was “mad” at Sherwin-Williams and refused to pay Sherwin-Williams for paint purchases because he “was going to use that money to sue [Sherwin-Williams].”  Weco’s principal also testified that he “was trying to hurt [Sherwin-Williams] by sending letters to Sherwin-Williams’ customers informing them of the pricing Sherwin-Williams was offering to their competitors.  The court concluded that while this deposition testimony showed that “there was no love lost between [Weco’s principal] and Sherwin-Williams, it does not support a finding that Weco brought the trade secret claim in bad faith.”  The court stated that civil litigation “is frequently engendered by animosity.  That is not the same as bad faith.”  The court found that the anger of Weco’s principal towards Sherwin-Williams was not sufficient to establish that Weco brought its trade secret claim to cause delay or harassment or was due to an improper motive.

While the defendant in the Weco case did not prevail on its attorneys’ fees motion, litigants in a trade secret misappropriation claim must continue to be aware of the penalties for bringing a trade secret claim in bad faith.  It is quite possible that a different court hearing the same evidence presented by Sherwin-Williams would have concluded that the owner’s “anger” at Sherwin-Williams was sufficient to constitute subjective bad faith and allow an award of attorneys’ fees.  Litigants are also reminded that they should seek to develop such evidence during discovery so that they can bring an attorneys’ fees motion should they prevail at the summary judgment stage.