Co-authored by Ted A. Gehring.

California Courts have discretion to award attorneys’ fees to a prevailing defendant in a trade secrets action where the commencement or continued prosecution of a trade secrets action is in bad faith. We have blogged about this issue twice previously. First, in connection with a malicious prosecution action that was filed against Latham & Watkins after the unsuccessful prosecution of a trade secrets action on behalf of a client. Second, in connection with SASCO v. Rosendin Electric, Inc., 2012 WL 2826955 (Cal.App. 4 Dist.), where the California Court of Appeal, Fourth Appellate District, affirmed the award of a $485,000 attorneys’ fees award issued after voluntary dismissal of trade secret claims prior to a hearing on a motion to summarily adjudicate the claims against the plaintiff.

On August 14, 2013, in an unpublished opinion, the California Court of Appeal, Fourth Appellate District in All American Semiconductor, LLC v. APX Technology Corp. (Case No. G046605, Cal. App. 4 Dist. 2013), affirmed a $202,291.50 attorneys’ fees award against a plaintiff for a bad faith prosecution of a trade secret claim.

In All American, the plaintiff, All American Semiconductor, LLC, was an investment group formed to purchase in bankruptcy and assume the name and all assets of All American Semiconductor, Inc. Among the assets acquired in bankruptcy was All American Semiconductor, Inc.’ s subsidiary, A.V.E.D., Inc., which included the Aved Memory Products business unit. The plaintiff believed that Aved’s intellectual property included ownership of memory modules designed by Aved and manufactured by third parties, including the defendant, APX Technology Corp. After acquiring All American Semiconductor, Inc., however, plaintiff was unable to locate designs for memory modules. The Plaintiff surmised that the designs were taken by Aved’s former general manager, Richard McCauley. McCauley left Aved shortly before All American Semiconductor, Inc.’s bankruptcy to form a new company manufacturing memory modules in conjunction with APX. The Plaintiff sued McCauley and APX, alleging claims for trademark infringement, unfair competition, conversion and misappropriation of trade secrets under the California Uniform Trade Secrets Act (“CUTSA), Cal. Civ. Code Section 3426.

APX moved for summary adjudication of the plaintiff’s trade secret claim, contending that Aved did not design memory modules and that all memory modules manufactured by APX were designed by APX. The plaintiff opposed summary adjudication based on statements in the bankruptcy bid materials that Aved designed memory modules. The plaintiff was unable, however, to set forth any evidence of specific memory module designs it believed had been misappropriated. The trial court granted APX’s motion for summary adjudication, concluding that there was no evidence of any specific design misappropriated by APX.

Trial proceeded on the remaining causes of action. Plaintiff prevailed on its trademark claim against McCauley, but the jury rejected the plaintiff’s conversion claims. On a post trial motion, the trial court awarded APX more than $200,000 in attorneys’ fees because the plaintiff continued to pursue its trade secret claim against APX without any evidence to support the claim.

On appeal, the Fourth District affirmed the trial court’s granting of summary adjudication to APX on the misappropriation claim and the award of attorneys’ fees under CUTSA, finding that the plaintiff’s misappropriation claim had been made in bad faith. The Court of Appeal noted that while CUTSA does not define bad faith, California courts have interpreted the term to include objective speciousness and subjective bad faith in bringing or maintaining the claim. The Court notes that subjective misconduct could be inferred from the objective speciousness of the plaintiff’s claim and the plaintiff’s conduct during the litigation. Critical to the Court’s analysis was the plaintiff’s inability to identify the trade secrets at issue. The Court noted that plaintiff’s separate statements of fact opposing APX’s motion for summary adjudication failed to set forth evidence of what constituted plaintiff’s actual trade secret. The plaintiff initially opposed summary adjudication claiming—without foundation—that it created and furnished memory module designs to APX. When APX replied pointing out that the evidentiary record did not support that claim, the plaintiff filed a supplemental opposition claiming it purchased memory module designs, but never actually identifying them. The Court of Appeal rejected the plaintiff’s claim that the trial court improperly struck the conclusory declaration of the plaintiff’s president that the claims had not been filed in bad faith.

Based on this decision, a plaintiff pursuing a trade secret claim must be careful that it can actually identify with some particularity what trade secrets have been misappropriated. General allegations of the existence of a trade secret and a belief they have been misappropriated will be insufficient to withstand summary adjudication, and may expose the plaintiff to liability for attorneys’ fees for pursuing a claim in bad faith.