Trade Secret Misappropriation and “malicious prosecution”

California Supreme Court to hear California Uniform Trade Secrets Act case

The California Uniform Trade Secrets Act addresses the misappropriation of trade secrets. Under UTSA, companies can allege a misappropriation of confidential business information and may recover money damages or obtain an injunction against another company or former employee who is found to have violated the provisions of UTSA.

While it is important for a company to protect trade secrets, employers and businesses should also be cautious about bringing unfounded claims for trade secret misappropriation. Under California law, a company that brings a claim of trade secret misappropriation with nothing more than suspicions or a desire to gain a competitive advantage may have to pay the opposing party’s legal fees for bringing the claim in bad faith.

Bad faith and malicious prosecution

Bad faith, in California, occurs when a lawsuit is brought without a reasonable belief that trade secret misappropriation has occurred. This can be a relatively low bar. For example, a decision to change employers alone is not evidence that misappropriation has occurred, nor is claiming trade secret misappropriation is inevitable. Bringing such a claim when there is little chance of finding evidence to support your claim can therefore be costly.

In addition, however, it is possible for a party to file a claim of malicious prosecution. Malicious prosecution is a legal claim filed against a party that has brought a claim “with malice and without probable cause.”

The California Supreme Court will soon clarify when a party has legal grounds to file a malicious prosecution claim after trade secret misappropriation litigation under UTSA.

Supreme Court to revisit defenses to malicious prosecution

The case, Parrish v. Latham & Watkins, rests on whether a trial court’s denial of summary judgment in a trade secret misappropriation claim precludes the opposing party from bringing a claim of malicious prosecution. A denial of summary judgment means the court was unable to decide the case solely on the basis of law – the case had to proceed to trial in order to resolve disputed facts.

The road to the Supreme Court in this case is long and complex, and not necessary to understand the underlying argument of the case. It is enough to note that California’s highest court will soon determine whether an “interim adverse judgment” is a defense against a malicious prosecution claim.

Put more simply, if a trial court found that there were some issues of fact in the case, can the opposing party still pursue a claim that the business bringing the original trade secret misappropriation claim had no merit?

If the Supreme Court holds that an interim adverse judgment is not a defense against malicious prosecution, then businesses and employers bringing a claim of trade secret misappropriation must be additionally careful about bringing a claim under UTSA. It is still unclear what the Supreme Court will decide. The court will not issue an opinion until 2016.

Questions?

Businesses and employers considering taking legal action against former employees for trade secret misappropriation should carefully consider the merits of their case. At Peterson Watts Law Group, LLP, our attorneys are familiar with the nuances of UTSA and trade secret misappropriation claims. Contact our office to discuss your situation and the benefits and potential pitfalls of filing such a claim.