Court Benchslaps Trade Secret Plaintiff and Counsel For Bad Faith Litigation–RBC Bearings v. Caliber
As you know, for the past year I’ve been railing against the Defend Trade Secrets Act’s unprecedented and ill-advised ex parte seizure provision. The good news is that, as far as I know, there’s only been one request for a DTSA ex parte seizure and the judge shut it down without any substantive discussion. The bad news is that the provision is obviously and mockably defectively designed because it assumes that trade secret plaintiffs will tell the truth to judges and that sanctions will deter them from lying. This, of course, is provably false; and we have a good source of contrary evidence in the trade secret context. The UTSA has a fee-shifting provision for bad faith maintenance of trade secret litigation, and those sanctions do not stop a steady stream of rulings finding plaintiff’s bad faith (see also this 2003 article). Each of those determinations now represents a situation where a judge probably would have wrongfully granted a DTSA ex parte seizure if asked, so each of these tells a little story about how ex parte seizures could go wrong.
Today’s case traces back to a group of departing employees who left for a competitor starting as early as 2006. In 2012, a key employee made the switch, so the plaintiff sued, and some ancillary lawsuits followed. In an August 2014 meet-and-confer, the plaintiff admitted that none of the documents produced in discovery contained any of the plaintiff’s trade secrets. In January 2015, the parties agreed to dismiss the lawsuit, but dismissal was subject to any attorneys’ fees and costs the judge may award.
The court looks at two factors in determining if plaintiff litigated in bad faith: (1) objective speciousness, and (2) subjective bad faith.
Objective Speciousness: The plaintiff litigated 7 trade secrets but abandoned 5 of them during the litigation. The remaining two relate to customer information: “Trade Secret No. 2 concerns RBC’s pricing policy and minimum quantity requirements for its customers. Trade Secret No. 3 concerns confidential customer profiles and compilations of customer preferences and information.” At the 2014 meet-and-confer, the plaintiff admitted that customer names weren’t a trade secret because the names were listed on the plaintiff’s website; but the plaintiff could only show that the departing employee disclosed customer names. Because “none of the evidence offered by RBC suggests that Alvarado, or any other defendant, wrongfully acquired, disclosed, or used RBC’s trade secrets,” the objective speciousness element was met.
Subjective Bad Faith: The court concludes “plaintiff’s motive for filing this action was not to protect its trade secrets, but to stifle competition with Caliber.” The court says:
plaintiff and plaintiff’s counsel acknowledged that they had no evidence of trade secret misappropriation at multiple points during the course of this litigation….the record is clear that plaintiff’s counsel was repeatedly notified of the evidentiary deficiencies of their client’s claims, and plaintiff’s counsel not only admitted as much, but proceeded with the case.
The court also criticizes the plaintiff’s maintenance of the ancillary litigation:
it appears that plaintiff, unable to obtain admissible evidence that defendants were in possession of Trade Secrets Nos. 1-7, initiated two state court lawsuits which were largely duplicative – without even attempting to ask this court to amend the operative complaint to bring in the claims and new defendant into this action – in an attempt to pursue additional discovery (after having served multiple sets of written discovery requests on defendants as recently as August 7, 2013) and wear down defendants.
The plaintiff also stiffed the cost awards to defendants in the ancillary litigation. The plaintiff said it did so out of “disdain” for the defendants. The court redefines “disdain” as “bad faith and malice.”
Finally, the court blasts the plaintiff’s counsel for making an unreasonable settlement demand–basically the total acquisition value of the business from which the employees departed, which was 10x the amount that the plaintiff’s expert later estimated was the plaintiff’s “best case scenario.” The judge was not amused:
If an attorney believes he or she cannot issue a good faith settlement demand without input from an expert, then the attorney should not issue the settlement demand. In other words, an attorney should not issue a settlement demand that is plainly a non-starter (i.e., frivolous) from the standpoint of initiating good-faith settlement discussions. Such a settlement demand not only undermines the credibility of the attorney issuing the demand, it is also disrespectful to the judge or settlement officer that is tasked with presiding over the settlement proceedings. Here, given the claims asserted by RBC in this action, RBC’s settlement demand based on the sale price of All Power – who is not even a party in this action – was inflammatory and clearly made in bad faith. RBC’s settlement demand bore no relationship whatsoever to plaintiff’s trade secret misappropriation claims.
A subsequent settlement proposal from the plaintiff sharply decreased the cash amount but asked for a non-compete-like provision the court says would be void per California B&P 16600. The court summarizes that “the settlement terms were inflammatory, violated public policy, and were made in bad faith.”
Attorneys’ Fees and Costs: The court awards $130k of attorneys’ fees (basically everything the defendant asked for) and $4k in costs.
The Benchslap: The opinion says “This Order is not intended for publication. Nor is it intended to be included in or submitted to any online service such as Westlaw or Lexis.” I’m not sure if a judge can keep an opinion out of Westlaw/Lexis or if/when those services voluntarily honor a request like this. The opinion isn’t in Westlaw but does appear in Lexis [RBC Bearings Inc. v. Caliber Aero, LLC, 2016 U.S. Dist. LEXIS 100521] with the quoted language intact.
Perhaps feeling that he was talking just to the parties and not issuing an overly public rebuke, the judge concludes the case with a benchslap of plaintiff’s counsel (cites omitted):
it is worth noting that it is likely that this costly and time-consuming litigation arguably could have been avoided and/or at least minimized had counsel for plaintiff been more diligent in complying with their ethical and professional obligations. Had defendants sought sanctions against plaintiff’s counsel, Annie Won and James Bohm, pursuant to 28 U.S.C. § 1927, Fed. R. Civ. P. 11 and/or the court’s inherent authority, the court believes their conduct might have warranted the imposition of sanctions against them personally. As discussed throughout this Order, much of the conduct in this case, including many of the arguments made by plaintiff’s counsel, was arguably unreasonable, vexatious and/or reckless. The court hopes that in the future plaintiff’s counsel will take their professional and ethical obligations more seriously….
Plaintiff’s counsel Annie Ventocilla Won and James Bohm shall, no later than August 3, 2016, provide a copy of this Order to the President of RBC and RBC’s General Counsel, and shall file a Declaration Re: Compliance with Court’s Order, no later than August 4, 2016. The Declaration shall include the name and address of the person’s [sic] provided with a copy of this Order, and the date on which the Order was provided.
I assume the court expected this mandatory notification would embarrass the counsel, but the RBC executives were sure to appreciate the judge’s displeasure when they wrote the $134k check. Further, we don’t know if the plaintiff’s counsel failed the client, or if the lawyers simply helped the client with an intentional lawfare scheme. If it’s the latter, the client wouldn’t care that the judge rebuked the lawyers. In contrast, if the judge had really wanted to draw some blood, the judge would have issued Rule 11 sanctions sua sponte or reported the lawyers to the State Bar.
Let’s start with the basics. A subset of plaintiffs, even trade secret plaintiffs, inevitably will engage in bad faith litigation. In the trade secret context, it occurs often enough that the UTSA expressly punishes the behavior. Yet, that sanction isn’t enough to deter the behavior. Given that, I still can’t believe that the DTSA drafters convinced Congress that the same bad faith dynamics wouldn’t repeat itself with ex parte seizures, no matter what punishments were snapped onto the seizure provision–a deficiency all the more glaring because of the seizure’s ex parte process where plaintiffs enter court with halos on their heads and a sob story in their hearts, and no one is around to tell the counterstory. That’s just bad policy.
This case illustrates several typical attributes of a bogus trade secret case:
* plaintiff bluster. The plaintiff was particularly upset that the departing employees allegedly lied about their new employer’s identity. Can you imagine how those alleged lies would be used in an ex parte proceeding to smear the defendant’s credibility and portray the plaintiff as a victim? Yet, after litigation, the court decided those alleged lies were completely irrelevant to the trade secret case.
* shifting theories. Over and over again, I read trade secret opinions where the plaintiff’s theory of the case evolves quite a bit from the complaint to the final adjudication. Usually this is because the plaintiff overclaims its trade secrets initially, or because it discovers that it was wrong about what information actually got taken or used. All of these facts emerge only through adversarial litigation. In an ex parte proceeding, the plaintiff’s initial theory of the case is the only story the judge will hear.
* failure of proof. In the end, the plaintiff couldn’t show any trade secret was misappropriated. The only information allegedly communicated was unprotectable customer names; and all of the other alleged misappropriations proved unsupportable or flat-out wrong. Of course, failure of proof is common in trade secret cases, but it’s hard or impossible to predict that result when hearing only the plaintiff’s story.
So long as the ex parte seizure provision remains unused by plaintiffs (or quickly rejected by judges), perhaps Congress just implemented a dumb but inconsequential policy. Still, given what we already know about trade secret plaintiff misbehavior, it’s clear that the risk of pernicious seizures will remain so long as the provision remains on the books.
I approached RBC and its counsel for comment and they declined.
Case citation: RBC Bearings Incorporated v. Caliber Aero, LLC, 8:12-cv-01442-FMO-PLA (C.D. Cal. Aug. 1, 2016)