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September 2011

Plaintiffs! Beware the Risks of Tactical or Preemptive Claims for Misappropriation of Trade Secrets

By | Trade Secrets - News & Publications

by Andrew Holland

The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009) is a clear warning to plaintiffs who pursue an action for misappropriation of trade secrets for the primary goal of stifling legitimate competition or without having any evidence to support the claim. The court examined all of the varied positions taken by the plaintiff, FLIR Systems, and found them all to be without merit, bad faith tactics and wholly lacking in evidentiary support. FLIR Systems paid the price for this: not only did the company lose the case it filed, the Court of Appeal affirmed the trial court’s order that because of its bad faith, FLIR Systems must pay the defendants more than $1.6 million in attorney fees and costs.
The defendants were shareholders and officers of Indigo, which manufactured and sold microbolometers, a device used in connection with infrared cameras, night vision, and thermal imaging. FLIR Systems purchased Indigo in 2004. The defendants had created a significant portion of Indigo’s technology. After the sale of the company, defendants continued working at Indigo.
In 2005, defendants decided to start a new company called Thermicon to mass produce bolometers. Before leaving Indigo, defendants approached FLIR Systems and offered it a non-controlling interest in Thermicon. FLIR Systems rejected the offer and wished defendants success in their new endeavor.
In early 2006, defendants entered into negotiations with another company, Raytheon, to acquire licensing, technology, and manufacturing facilities for Thermicon. Fearful that Thermicon would pose a competitive threat, FLIR Systems sued defendants, claiming that defendants could not mass produce low-cost microbolometers based on the Thermicon time line without misappropriating FLIR Systems’ trade secrets. Upon learning of the lawsuit, Raytheon terminated its negotiations with defendants, and defendants decided not to go forward with Thermicon.
FLIR Systems dismissed its claim for damages, apparently because the company had not suffered any damages, but nevertheless proceeded to trial seeking a permanent injunction prohibiting defendants from making use of FLIR Systems’ trade secrets, selling certain microbolometers in commercial markets less than 12 months after defendants entered into a license with any third party to purchase intellectual property, or using a specified FLIR Systems database.
After substantial testimony, the trial court found no misappropriation or threatened misappropriation of trade secrets. Instead, the trial court found that the action was brought in bad faith, based on the theory of “inevitable disclosure1,” a doctrine not recognized by California courts because it contravenes a strong public policy of employee mobility that permits ex-employees to start new entrepreneurial endeavors. (See Continental Car-Na-Var v. Moseley (1944) 24 Cal.2d 104, 110; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462.) In addition, FLIR Systems was ordered to pay defendants’ attorney fees and costs in the amount of $1,641.216.78 pursuant to Section 3426.4 of the California Uniform Trade Secrets Act which provides: “If a claim of misappropriation is made in bad faith, … the [trial] court may award reasonable attorney’s fees and costs to the prevailing party”,.
The trial court based its finding on the complete lack of evidence of economic harm, threatened or actual misappropriation of trade secrets, or ongoing wrongdoing, and the overwhelming evidence that FLIR Systems’ motivation for filing suit was for an anticompetitive purpose. It was uncontroverted that defendants received no funding for Thermicon, did not start a new business, had no employees or customers, did not lease a facility or develop technology, and did not design, produce, sell, or offer to sell infrared products.
The trial court further found that FLIR Systems maintained the action in bad faith by imposing unnecessary settlement conditions. In a settlement letter, defendants described their plan to acquire technology from a third party, restated that they would not misappropriate FLIR Systems’ trade secrets, attached copies of their business plan, and agreed to have a third party monitor and review the technology that defendants would develop. In response, FLIR Systems demanded $75,000, a non-competition covenant, and an agreement that defendants would not hire FLIR Systems’ employees or challenge Indigo’s patent applications. Weighing against FLIR Systems was the fact that its Chief .
Intellectual Property Officer testified that the $75,000 demand was “inflamatory”. The trial court found that the other settlement terms were not related to the trade secret action and were made for an anticompetitive purpose2.
In short, the Court of Appeal agreed with the trial court that FLIR Systems’ conduct was objectively specious and subjectively motivated by bad faith, and that it had no evidence whatsoever to support its claim. Even the testimony of the company’s officers and its independent expert witnesses undermined its case, and reinforced the finding that the action was a baseless, bad faith tactic.
FLIR Systems signals a warning to any party contemplating prosecuting a specious trade secret action, and highlights the strength of California’s public policy in favor of employee mobility. In too many instances, employers alleging misappropriation of trade secrets against their former employees do not conduct adequate pre-litigation due diligence prior to filing a claim, or they simply file a claim under the California Uniform Trade Secret Act based on speculation that an employee with intimate knowledge of the company’s business will use that information to unlawfully compete, or worse, for an anticompetitive purpose. This often has a devastating effect on the defendant employee’s ability to subsequently survive or prosper in a competitive industry when potential and actual customers will avoid maintaining a business relationship due to the risks and negative perception associated with litigation. As FLIR Systems demonstrates, a company that believes it may be a prudent business tactic to file a claim under the California Uniform Trade Secret Act, without evidence of a threat of misappropriation or actual misappropriation of trade secrets having already occurred, should reconsider filing suit or risk paying the defendants’ attorney fees and costs. Too often such actions are filed as a legally driven tactic to secure a competitive advantage, rather than as an effective response to actual wrongdoing based on real evidence. FLIR Systems should give pause to any party considering such tactics.
1 The doctrine of inevitable disclosure is not law in California – mere speculation that a potential defendant may misappropriate and use a trade secret without threatened misappropriation or actual misappropriation will not support a claim. (Continental Car-Na-Var v. Moseley, supra, 24 Cal.2d at pp. 107–108 [injunction may not issue based on employer’s speculation]; GlobeSpan, Inc. v. O’Neill (C.D. Cal. 2001) 151 F.Supp.2d 1229, 1235.) “A trade secrets plaintiff must show an actual use or an actual threat.” (Bayer Corp. v. Roche Molecular Systems, Inc. (N.D. Cal. 1999) 72 F.Supp.2d 1111, 1120.)
2 The proposed non-competition clause was an unlawful trade restraint. (Bus. & Prof. Code, § 16600) and the prohibition against hiring FLIR Systems’ employees and challenging Indigo’s patent applications violated public policy.