At Risk: Law Firms Bringing Bad Faith Trade Secrets Claims

4 minute read | November.20.2015

Companies get anxious when key employees leave to start new ventures. A company may try to shield itself from the risk of losing confidential information by seeking an injunction preventing its former employees and their new company from using or disclosing trade secrets. However, without sufficient evidence of actual misappropriation or threat of imminent harm, a company may face sanctions for bringing a misappropriation claim in bad faith, as Trade Secrets Watch has previously discussed. Filing or maintaining a premature misappropriation action carries other risks. Currently before the California Supreme Court is a malicious prosecution claim against a law firm for pursuing a meritless misappropriation suit. Parrish v. Latham & Watkins, LLP, No. S228277 (Cal. petition for review granted Oct. 14, 2015).

In 2004, FLIR Systems, a manufacturer of infrared cameras and thermal imaging systems, acquired Indigo Systems, a manufacturer of microbolomoters, which are components for FLIR’s products. Two Indigo officers continued working at Indigo after the acquisition. The two officers left Indigo in 2006 to start a new company that would also manufacture microbolomoters.

Despite the former officers’ offer to FLIR of a noncontrolling interest in their new project—which FLIR rejected—and the former officers’ assurance that they would not misappropriate Indigo trade secrets, FLIR sued them for injunctive relief and damages in California state court.

FLIR initially defeated the former officers’ motion for summary judgment because the judge determined there were triable issues of fact as to whether the former officers’ new business plan contained Indigo’s trade secrets. The judge relied in part on FLIR’s expert declarations that the former officers could not succeed at their new venture without using Indigo’s trade secrets.

Ultimately, following trial, the California court rejected FLIR’s claims. The court found that FLIR had no evidence of misappropriation, threatened misappropriation, imminent harm, or ongoing wrongdoing. The court determined that FLIR’s claim impermissibly rested on the inevitable disclosure doctrine, which posits that an employee’s new job responsibilities at a competitor will inevitably require the employee to disclose his previous employer’s trade secrets. Yet California does not recognize the inevitable disclosure doctrine because its application results in restricted employee mobility. Moreover, the court sanctioned FLIR for bringing the action in bad faith and awarded $1.6 million in attorneys’ fees and costs to the former officers under California’s Uniform Trade Secrets Act, Section 3426.4. The court noted that FLIR’s experts had conceded at trial that their declarations referenced unaccepted scientific methodologies and included false assumptions. The Court of Appeals affirmed the bad faith award against FLIR.

Sanctions against FLIR may have been the correct result, but it is not clear that California’s pro-competition policy underlying the sanctions was vindicated given that the former officers had to disband their new company only months after FLIR filed suit. The former officers sought additional redress by filing in 2012 a malicious prosecution suit against FLIR’s attorneys—law firm Latham & Watkins and individual Latham attorneys. The former officers alleged that Latham unlawfully brought the misappropriation action on FLIR’s behalf because Latham knew that the inevitable disclosure theory upon which FLIR based its claims was untenable in California and Latham knew that FLIR’s purpose in suing the former officers was anti-competitiv.

Latham successfully struck the malicious prosecution complaint on the ground that the statute of limitations had expired. On appeal, the court found that the malicious prosecution claim was timely but that the “interim adverse judgment rule” protected Latham from the claim. This rule holds that a plaintiff’s success in the underlying action at trial or on a dispositive motion, even though the defendant ultimately prevailed, establishes sufficient probable cause for the plaintiff to have brought the underlying action and thereby defeats the defendant’s malicious prosecution claim. That is, even though the former officers prevailed against FLIR’s misappropriation claim and even obtained an award against FLIR for bringing the claim in bad faith, the former officers’ failure to sustain their summary judgment motion against FLIR insulated Latham from the malicious prosecution claim.

The California Supreme Court has accepted the former officers’ appeal. The former officers argue that Latham cannot benefit from the interim adverse judgment rule because Latham knowingly submitted false evidence—FLIR’s expert declarations—to obtain FLIR’s victory at summary judgment, which they argued creates an exception to the interim adverse judgment rule. The former officers also contend that the lower court’s interpretation of the interim adverse judgment rule will discourage trade secrets defendants from moving for summary judgment. A ruling for Latham, they argue, could encourage companies, and their lawyers, to bring speculative claims against former employees to minimize the risk that former employees will use or disclose sensitive information. Conversely, a ruling against Latham in this matter, they argue, will advance public policies of free competition and employee mobility.