Know When to Fold ‘Em: Avoiding Bad Faith When Litigating Trade Secrets Cases

4 minute read | September.07.2013

In his classic song The Gambler, Kenny Rogers famously advised: “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” It’s good guidance for surviving a poker table, but also important to plaintiffs prosecuting trade secret claims.  Understanding your evidence — or lack thereof — can mean the difference between winning or losing and having to pay your opponent’s attorneys’ fees.

In the recent case of All American Semiconductor LLC v. APX Technology Corp., a California appellate court affirmed a trial court’s award of $200,000 in attorneys’ fees against a plaintiff for prosecuting a trade secret case in bad faith.  Though the case is not published, it is a good reminder that aggressively pursuing and maintaining trade secret claims based on speculation and suspicions, without strong evidence, can have serious consequences.

California’s Uniform Trade Secrets Act provides for attorneys’ fees when a plaintiff has brought a bad-faith trade secret claim.  It states: “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.”

In this case, plaintiff All American Semiconductor had purchased a company’s assets out of bankruptcy believing that one of its subsidiaries, Aved, had ownership of intellectual property covering certain memory module designs. Its belief was based on a statement in the bid solicitation package referring to modules “designed by the Company,” and “manufactured by third party companies.” After the purchase, All American discovered that Aved had no paper or computer files reflecting any designs, drawings, or plans, and suspected that Aved’s former general manager had stolen them. All American sent a businessperson to inspect Aved’s offices. When she found empty computer file folders with labels like “Document” and “GDDR226,” she concluded that the computers had been intentionally wiped to cover up misappropriation.

All American sued Aved’s former general manager, his new company AMP, and a third party called APX that it believed had previously assembled modules based on Aved’s designs. All American claimed they had stolen Aved’s designs. The general manager testified that Aved had never actually done any design work itself — it simply assembled memory modules based on designs that it had acquired from APX. Basically, the defense was that All American didn’t do its due diligence during the asset purchase, and that the reality was that there never were any Aved designs, let alone trade secret designs.

The defendants moved for summary judgment on the basis that All American never identified any Aved designs, and that no witnesses could describe who, how, when, or where anyone at Aved ever designed any specific memory module.  All American countered by pointing to the statement in the bankruptcy sale packet that the modules were “designed by the Company,” a former Aved shipping clerk’s declaration saying he believed Aved had designed modules, and the empty “GDDR226” folder and suggesting that certain Gerber software that can be used to design modules may have once been on Aved’s computers.

But All American apparently started seeing the flaws in its evidence, because it also offered an alternate theory of liability.  All American contended that even if Aved didn’t do any designs itself, it obtained an exclusive IP and trade secret interest over the designs it had gotten from APX that Aved was assembling.

The trial court found that All American had failed to prove the existence of the claimed trade secrets or its status as the owner of any alleged trade secrets, and that it prosecuted the suit in bad faith.  In California, bad faith requires both “objective speciousness” of the plaintiff’s claims as well as “subjective bad faith in bringing or maintaining the claim.”  The court found both, and ordered All American to pay the defendants $200,000 to reimburse them for their attorneys’ fees.

The appellate court affirmed, holding that All American’s inability to offer any evidence of what the alleged trade secrets were could support a finding of objective speciousness.  The appellate court also held that the trial court could have inferred that All American had subjectively acted in bad faith based on its continued prosecution of the case in the face of its evidentiary shortcomings, and its attempt to change its theory of liability to a new one that also lacked specificity and supporting evidence.

This case is an important reminder that merely suspecting misappropriation at the outset cannot be the only consideration when filing and continuing to prosecute a lawsuit.  Does this mean that All American should have “folded” and stopped pursuing its claims?   Maybe.  At minimum, All American seems to have badly misjudged its computer forensic evidence, a topic Trade Secrets Watch has discussed previously.  This case underscores a trade secret plaintiff’s need to continually evaluate the evidence supporting its claims.  If you’ve got a bad hand, you need to know when to walk away (or maybe even run).