Trade Secret Cases Can Backfire

Trade secrets, by their very nature, can be a company’s most prized possession. And when employees make off with a former employer’s trade secrets, such as confidential prospect and customer lists, secret formulas, computer software code, and the like, it has not been uncommon for the employer to file a lawsuit to prevent the employee from using the trade secrets for their own financial gain and, if possible, to recover the secrets. However, a recent California Court of Appeal decision serves as notice that employees must be careful in how they proceed, particularly if they do so in “bad faith.”

In FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), the Court of Appeals affirmed a $1.6 million attorney fee award to the defendants upon a finding that the action was brought in bad faith. The decision provides some insight into the various factors that may contribute to a determination of bad faith and highlights the importance of considering carefully whether to bring a misappropriation claim against former employees. This is especially true when there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, a manufacturer and distributor of microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. Defendants Parrish and Fitzgibbons were officers of Indigo and continued to work there after the sale. After about a year, Parrish and Fitzgibbons decided to start a competing company based on a business plan originally developed by Fitzgibbons several years before FLIR acquired Indigo.

In 2006, defendants began negotiations with Raytheon Company and assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets. Not satisfied, FLIR and Indigo sued defendants on the theory that they must have misappropriated trade secrets in order to compete with FLIR by mass producing low-cost microbolometers. Raytheon promptly terminated the business discussions with defendants, forcing them to abandon their fledgling business and to sue FLIR and Indigo.

At trial in late 2007, the Court found there was no misappropriation or threatened misappropriation of trade secrets because it was undisputed that defendants received no funding for their business, never actually started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. In successfully defending the FLIR and Indigo misappropriation of trade secrets and California Unfair Competition Act (Civil Code Section 3426.4) claims, the trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees as the prevailing party.

In its June 2008 statement of decision, the Court held that plaintiffs had brought the action based on the doctrine of “inevitable disclosure,” essentially arguing that even though there was no evidence of actual disclosure it was likely there would eventually be disclosure of the FLIR and Indigo trade secrets. However, California courts have repeatedly rejected the “inevitable disclosure” doctrine and the Court found FLIR and Indigo to have brought the action in bad faith. In issuing its ruling, the Court considered the following factors significant:

• The absence of any economic harm.

• The absence of any evidence of misappropriation or threatened misappropriation of trade secrets.

• Evidence that the defendants had an anticompetitive motive in filing the lawsuit.

• Failure by the defendants to identify what trade secrets would be subject to the permanent injunction.

• The imposition of unnecessary settlement conditions during negotiations.

• Defendant’s experts admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets actually had been misappropriated.

The FLIR decision is a reminder to employers to exercise caution when deciding to file litigation against former employees for trade secret misappropriation, particularly where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer risks not only dismissal of its claims but the possibility of significant monetary sanctions.

David Baker
The Airsoft Lawyer