Co-authored by Ted Gehring.

On April 6, 2012, Latham & Watkins was sued for malicious prosecution in Los Angeles Superior Court. The suit alleges that the Plaintiffs, William Parrish and Timothy Fitzgibbons, were former officers and shareholders of Indigo Systems Corporation, which was purchased by FLIR Systems, Inc. in 2004. From 2004 to 2006 the Plaintiffs worked for FLIR, leaving in 2006 to start their own business. FLIR retained Latham and sued them for, among other things, misappropriation of trade secrets. The trial court denied FLIR’s request for a permanent injunction, found FLIR brought the trade secrets action in bad faith, and awarded attorney’s fees and costs of $1,641,216.78, which was less than the $2,399,650.55 in attorney’s fees that were requested. The trial court’s decision was affirmed on appeal. FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

The trial court and appellate court decisions (both of which are attached to the Complaint) make fascinating reading for trade secret practitioners – particularly those who practice in California.

The trial court based its bad faith finding on, in part, its conclusion that the lawsuit was pursued based on an “inevitable disclosure” theory and that doctrine is not recognized in California. FLIR argued that it was not proceeding on an inevitable disclosure theory; rather, it contended it was alleging “threatened misappropriation” under the Uniform Trade Secrets Act (California Civil Code § 3426.2(a)). The trial court rejected this argument, concluding threatened misappropriation is not a substitute for an inevitable disclosure theory, and that since FLIR had no evidence that indicated imminent trade secret misuse, there was no threatened misappropriation.

In finding that FLIR filed and prosecuted the action in bad faith, the court pointed out, among other things, that a third party ended business negotiations with Parrish and Fitzgibbons because the lawsuit had been filed, that they did not start their new business venture, and that at the time of trail had no plans to do so because that deal with the third party fell through. The court concluded that continuing the lawsuit for 18 months through trial effectively disrupted Parrish and Fitzgibbons’ plans to start a new company.

The appellate court also agreed with the trial court that FLIR engaged in bad faith settlement tactics by imposing unnecessary settlement conditions. In particular, FLIR responded to one settlement offer by demanding $75,000.00, a non-competition agreement, and an agreement that Parrish and Fitzgibbons would not hire FLIR’s employees or challenge certain patent applications. The court found that the settlement condition that Parrish and Fitzgibbons not work with certain third parties was an unlawful trade restraint, and that the condition that they not hire appellant’s employees likewise violated public policy, as did the demand that Parrish not communicate relevant information to the federal government about the patent application.

The malicious prosecution complaint against Latham alleges that there is a related malicious prosecution action against FLIR and that Plaintiffs did not discover the basis for the malicious prosecution action against Latham until May 2010, when FLIR indicated at a court conference in the related malicious prosecution action that they might by invoking the advice of counsel defense. So it appears there will be a statute of limitations defense to be litigated.

We will follow the progress of this case, and it will be interesting to see if Latham files a motion pursuant to California’s anti-SLAPP law (a strategic lawsuit against public participation – California Code of Civil Procedure 425.16).

In California, malicious prosecution actions are often “SLAPPed” early in the case. The SLAPP statute is designed to prevent lawsuits brought primarily to chill a valid exercise of constitutional rights of freedom of speech and petition, and FLIR’s original lawsuit is such a right. If Latham files a SLAPP motion, Parrish and Fitzgibbons would have to establish that there is a probability that they will prevail on the claim, and if Latham prevails, it would be entitled to its attorneys’ fees.

The initiation of a trade secret/unfair competition action against a start-up business can crush that business even if the action lacks merit. Here, it appears as if FLIR’s lawsuit was successful in preventing Parrish and Fitzgibbons from establishing their new business venture even though FLIR ultimately lost the case. In view of the two malicious prosecution actions and the strong language in trial court and appellate court decisions regarding FLIR’s motives and tactics, it remains to be seen whether FLIR’s prosecution of the underlying action was a good or bad business decision.