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March 31, 2016 Practice Points

How to Avoid Sanctions and Suits for Filing Frivolous Trade Secrets Claims

Frivolous suits for misappropriation of trade secrets may end up with court imposed sanctions or defending malicious prosecution.

by Candace R. Duff

Attorneys and law firms who file frivolous suits for misappropriation of trade secrets on behalf of their clients may end up paying the opposing party's attorney's fees as a result of court imposed sanctions or, worse yet, defending themselves in malicious prosecution cases.

In Homecare CRM, LLC v. Adam Group, Inc. of Middle Tenn., 952 F.Supp.2d 1373 (N.D. Ga. 2013), the court sanctioned a company and its counsel for filing a baseless trade secrets claim. Specifically, the court found that emails and other evidence in the plaintiff's possession negated the factual bases for the claim, making it objectively frivolous when filed, and that the plaintiff's counsel violated Fed.R.Civ.P.11 by signing the pleading containing the claim. Id.

The Latham & Watkins law firm found itself defending a malicious prosecution lawsuit after being defeated in a bench trial in a misappropriation of trade secrets case it filed on behalf of an employer against a group of former employees attempting to launch a competing business. The trial court not only ruled in the plaintiffs' favor at trial, but also found the claim to have been brought in bad faith. The former employees later filed a malicious prosecution suit against Latham & Watkins alleging that the firm knew the legal theory for the suit (inevitable disclosure) had been discredited in the state of California and that the employer had an anticompetitive motive for suing them. The lower court held that the malicious prosecution claim was barred by the "interim adverse judgment rule" because the trial court in the original case had denied a motion for summary judgment filed by the former employees on the trade secrets claim even though it later ruled in their favor at the bench trial. The California Court of Appeal upheld the trial court's ruling that the claim was barred. Parish v. Latham & Watkins, 238 Cal.App.4th 81 (2015). However, Latham & Watkins' battle on this issue is far from over. The California Supreme Court announced that it will reconsider the appellate court's decision. The matter is now pending before it.

What can we learn from these two cases to avoid being sanctioned or sued for filing frivolous trade secrets cases? We can learn the following:

  1. Don't file a factually baseless claim. This may seem obvious but it's not. Before filing a trade secrets claim (or any other claim for that matter), be sure to thoroughly vet the claim, the witnesses, and the documents to make sure there is actually a factual basis for it and no documents completely negating and/or contradicting the claim. A mere suspicion that there has been a misappropriation of trade secrets is not enough to provide a factual basis.
  2. Don't file a legally baseless claim. Make sure that your legal basis for the claim is one that is viable in the jurisdiction in which you are bringing it. If the courts in that jurisdiction have consistently rejected, discredited, or failed to recognize the legal theory forming the basis of the claim, chances are the court will find the claim to be frivolous.
  3. Be mindful of your client's motives. It's one thing if your clients wish to protect genuine trade secrets. It's another if their sole motive for bringing a trade secrets lawsuit is to stop their former employees from competing with them.
  4. If you later discover the claim to be frivolous, dismiss it. Fed.R.Civ.P. 11 requires us to dismiss any lawsuit we learn to be frivolous at any point in the litigation. It's better to be safe than sorry.

Keywords: Commercial litigation; business litigation; trade secrets; malicious prosecution; sanctions

Candace R. Duff, Esq. is with the City Attorney's Office in Fort Lauderdale, Florida.

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