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December 17, 2014 Articles

Slapping Away Claims of Trade Secret Theft

Learn how to use one of the most powerful tools for defenses against business tort claims.

By Linda M. Glover

One of the most powerful arrows in the quiver of defenses against business tort claims is the anti-SLAPP motion to dismiss. Anti-SLAPP motions expedite the early dismissal of Strategic Lawsuits Against Public Participation (SLAPP), or lawsuits aimed at preventing citizens from exercising their rights to free speech, association, or to petition the government for redress. Anti-SLAPP motions expedite the early dismissal of such suits. SLAPPs are generally described as actions without substantial merit brought against individuals or groups with the intention of silencing the opponents, or at least diverting their resources. See John C. Barker, “Common-Law and Statutory Solutions to the Problems of SLAPPs,” 26 Loy. L.A. Rev. 395 (1993). In SLAPPs, litigation itself is the weapon chosen by plaintiffs not only to silence defendants but also to launch a shot across the bow to others contemplating voicing similar concerns.

Hallmarks of an Anti-SLAPP Motion There is no federal law authorizing anti-SLAPP motions. Rather, they are creatures of state statutes or common law. A majority of states have enacted anti-SLAPP statutes with the universal legislative intent of balancing the protection of First Amendment rights against the interest in remedying private injuries under state tort law. While each state’s statute is unique, most set forth a two-pronged procedure by which anti-SLAPP motions are evaluated. First, a defendant must make a threshold showing that the act or acts giving rise to the claim(s) asserted were in furtherance of the right to petition or free speech. See, e.g.Hilton v. Hallmark Cards, 599 F.3d 894, 903 (9th Cir. 2010) (applying anti-SLAPP state statute in a diversity action). If the defendant makes this initial showing, then the burden shifts to the plaintiff “to establish, with admissible evidence, a reasonable probability of prevailing on the merits.” Kreeger v. Wanland, 46 Cal. Rptr. 3d 790 (Cal. Ct. App. 2006).

Some states’ statutes mandate that discovery be stayed upon the filing of an anti-SLAPP motion, although most also allow courts upon good cause to order specified and limited discovery. In addition, some states prohibit the amendment of pleadings once an anti-SLAPP motion has been filed. Thus, a heavy burden is imposed on plaintiffs to have evidence in hand and pleadings in good order before filing a suit that might become the subject of a responsive anti-SLAPP motion.

Applicability of Anti-SLAPP Motions Anti-SLAPP motions were initially applied in the development/environmental context in which large development companies sued neighborhood associations or environmentalists hoping to suppress the activists’ speech on a variety of issues such as nuisance, pollution, and hydraulic fracturing (eco-SLAPPs). While defamation claims are now the most common subject of anti-SLAPP motions, inventive defendants have expanded their reach to misappropriation of trade secrets claims, fraud, breach of settlement agreements, declaratory and injunctive relief, conversion, trade libel, slander and libel, use of false and misleading statements in commerce under the Lanham Act, tortious interference with existing or prospective business relationships, and other business torts.

Among the more interesting anti-SLAPP motions are those that have been successfully employed by defendants in response to misappropriation of trade secrets claims. Proving theft of trade secret claims ordinarily requires extensive routine and time-consuming forensic discovery, but most state SLAPP statutes either prohibit discovery or permit limited discovery only upon a showing of good cause once an anti-SLAPP motion has been filed. Accordingly, plaintiffs asserting misappropriation of trade secret claims are at a substantial disadvantage when defendants file an anti-SLAPP motion quickly after litigation has commenced.

For example, in Commonwealth Energy Corp. v. Chappel, No. G026344, 2002 Cal. App. Unpub. LEXIS 4866 (Cal. Ct. App. 4th Jan. 15, 2002), Chappel, a former employee, sued Commonwealth Energy Corp., asserting a breach of contract claim arising out of Commonwealth’s alleged failure to pay commissions and deliver stock Chappel considered due to him. About 10 months after filing suit, Chappel anonymously sent copies of a highly unfavorable newspaper article about Commonwealth to a large number of its shareholders. The article called into question Commonwealth’s profitability and described several former employees’ lawsuits against Commonwealth that asserted claims similar to Chappel’s.

Commonwealth traced the distribution of the article to Chappel and filed suit against him on various grounds, including misappropriation of trade secrets. Commonwealth claimed that its shareholder list was a closely guarded secret protected on company computers by a password never provided to Chappel. Commonwealth further alleged that Chappel had improperly gained access to the password, downloaded the list, and removed it from Commonwealth’s premises without permission. According to Commonwealth, the distribution of the article by Chappel caused several of its shareholders to question Commonwealth’s business practices and to terminate their investment relationship with the company. Commonwealth also alleged that the list was valuable because its disclosure could enable competitors to vie for funds from Commonwealth’s previously undisclosed investors.

Chappel responded to Commonwealth’s suit with an anti-SLAPP motion to dismiss. In support of his motion, Chappel declared that he had anonymously distributed the disparaging article to Commonwealth’s shareholders to force a settlement of his lawsuit against the company. Chappel also claimed that he had obtained the list during his employment with Commonwealth, and that no one at any time during or after his employment had ever indicated that the list was proprietary or that access to it was restricted. A Commonwealth employee and an ex-employee both confirmed Chappel’s testimony.

In opposition to Chappel’s motion, Commonwealth’s chairman submitted his own declaration affirming the company’s position that the list was password protected and that it had been improperly obtained and used by Chappel. Notably, Commonwealth filed no other evidence—forensic or otherwise—in support of its claims.

The trial court denied Chappel’s anti-SLAPP motion. On appeal, however, the court found that Chappel’s distribution of the offending article arose out of his constitutionally protected right to petition the government. The court commented that there was no doubt that Commonwealth had sued Chappel because he sent Commonwealth’s shareholders the unfavorable article and that Chappel had done so to promote a settlement of his breach of contract claim against Commonwealth. The court concluded that the mailings were written statements made in connection with an issue under consideration by a judicial body and were therefore protected by the First Amendment. The appellate court then turned to Commonwealth’s evidence and deemed it insufficient to establish a probability that Commonwealth would prevail at trial.  Similarly, and more recently, in Schlumberger Ltd. v. Rutherford, No. 2014-13621 (127th Dist. Ct., Harris County, Tex. Sept. 8, 2014), Schlumberger filed misappropriation and theft of trade secret claims, among others, against Rutherford, its former deputy general counsel of intellectual property, only to fall prey to Rutherford’s early filed anti-SLAPP motion to dismiss. In her position with Schlumberger, Rutherford was responsible for managing and directing the strategy, protection, procedures, and monetization of Schlumberger’s global intellectual property portfolio. She was exposed to Schlumberger proprietary information, the confidentiality of which she was bound to protect as a matter of fiduciary duty and contract.

Rutherford resigned her position with Schlumberger to join Acacia Research Group. The relationship between Rutherford and Schlumberger appears to have remained cordial until Dynamic 3D Geosolutions, LLC, one of Acacia’s subsidiaries, sued Schlumberger for patent infringement. Schlumberger subsequently sued Rutherford, alleging it had only recently discovered that in the days leading up to her departure, she had inserted multiple flash drives into her company-issued laptop and downloaded Schlumberger proprietary information onto more than one of the drives.

Schlumberger also alleged that Rutherford had engaged a third party to assist her in copying Schlumberger confidential information onto an external hard drive, removed Schlumberger proprietary hard-copy documents from her office, and deleted a large number of files from her laptop. Schlumberger further alleged that Rutherford used Schlumberger’s proprietary information to assist Acacia in acquiring patents Rutherford knew Schlumberger could be sued for infringing, including the patent that served as the basis of Dynamic’s lawsuit against Schlumberger.

About five weeks after Schlumberger sued Rutherford, she responded by filing an anti-SLAPP motion to dismiss in which she characterized Schlumberger’s lawsuit as an attempt to intimidate her, and anyone associated with her, from petitioning the courts for redress of Schlumberger’s patent infringement. Under the Texas SLAPP statute, discovery is stayed immediately upon the filing of an anti-SLAPP motion to dismiss. Between the inception of Schlumberger’s lawsuit against Rutherford and the filing of her motion to dismiss, however, the parties had engaged in minimal expedited discovery that permitted Rutherford to poke holes in affidavits filed in support of Schlumberger’s claims against Rutherford.

The trial court made an initial finding that Dynamic’s claims related to the First Amendment right to petition the government for redress. The burden then shifted to Schlumberger to establish by “clear and specific evidence a prima facie case for each essential element” of its claims against Rutherford. Tex. Civ. Prac. & Rem. Code § 27.005(c). The court found that Schlumberger failed to meet this burden, granted Rutherford’s anti-SLAPP motion to dismiss, and awarded her both attorney fees and monetary sanctions against Schlumberger. Schlumberger’s appeal of the trial court’s order is pending.

Evidentiary Standard Applicable to Anti-SLAPP Motions to Dismiss  The decisions in Rutherford and Chappel raise the question of what type of evidence is sufficient to permit plaintiffs to carry their burdens for the second prong of the anti-SLAPP analysis as it pertains to misappropriation of trade secret claims. In Rutherford, circumstantial evidence of purported wrongdoing did not carry the day, and in Chappel, an affidavit that in most cases would have precluded summary judgment was inadequate to stave off dismissal.

Indisputably, deceit is at the heart of any legitimate misappropriation or theft of trade secrets claim, and those who attempt to deceive generally take great precaution to ensure that their wrongful actions are difficult to discover. Thus, while plaintiffs may be able to ascertain some circumstantial evidence of misappropriation of trade secrets prior to filing suit, a complete forensic examination of electronic devices in defendants’ control is seldom possible until after suit has been filed. Moreover, establishing that the defendants not only used the purloined trade secrets but also that the plaintiffs were damaged by such use ordinarily requires conducting substantial third-party discovery. Because discovery is stayed in most jurisdictions upon the filing of anti-SLAPP motions, or minimally allowed upon a showing of good cause, however, plaintiffs may find themselves at a severe disadvantage when filing suits for misappropriation of trade secrets against defendants entitled to First Amendment protection under anti-SLAPP statutes.

Keywords: litigation, business torts, strategic lawsuits against public participation, SLAPP, anti-SLAPP, trade secrets

Linda M. Glover – December 17, 2014