Dumb Settlement Comments Can Help Establish Bad Faith in Trade Secrets Case

There's a perception that anything written in a settlement letter is privileged.

This perception is decidedly wrong.

Offers of settlement are not admissible to prove liability because we want to encourage parties to resolve their disputes out of court. If those offers were admissible, then parties would be hesitant to mediate disputes. This is a simple, common-sense rule. But that rule doesn't give a party carte blanche to say whatever it wants in a settlement letter and then hide under the cloak of privilege.

As readers of this blog know, trade secrets disputes can go horribly wrong for plaintiffs, my case of Tradesmen International v. Black from the Seventh Circuit being a recent example. But because of the overly emotional nature of competition cases, plaintiffs frequently double down when litigation goes south. It is quite common, in fact, for trade secrets plaintiffs to make outrageous settlement demands, or ridiculous statements in a settlement letter, even in the face of a significant defeat.

Those plaintiffs better be careful what they say in settlement letters, however.

If those letters contain over-the-top missives, improper threats, or even pie-in-the-sky demands, the statements aren't privileged and can help establish bad faith. Remember: a defendant gets his attorneys' fees if he can prove a plaintiff brought or maintained a trade secrets misappropriation claim in bad faith.

So what kind of statements in a settlement letter are not privileged? Generally, I find there are two categories that get plaintiffs in trouble.

First, the plaintiff often makes comments about how much continued litigation is going to cost, or indirect references to the fact that an appeal is going to be expensive for a prevailing party to defend. These sort of threats aren't privileged because even an idiot lawyer knows that further litigation costs money, and it's completely disconnected from an offer of settlement. Threatening a defendant into spending further legal fees indicates the plaintiff simply is pursuing litigation to force its adversary to bear the burdens of litigation - not to achieve a specific result at judgment.

Second, the plaintiff may make irrational demands as part of a settlement term sheet - often times totally disconnected to the actual dispute. In past cases (both in Iowa and California), courts have looked to outrageous settlement demands that have nothing to do with trade secrets claims as evidence of subjective bad faith. For instance, demanding a broad non-compete in California (where non-competes are unenforceable) as part of a settlement would demonstrate bad faith intent. So, too, would damages demands far in excess of a trial disclosure and demands to avoid certain customers or product lines, even though this is not part of the relief sought in the complaint. Even though these are terms of the offer, they aren't privileged as settlement communications because they don't tend to establish the plaintiff's case is worth less than what it claims.

Settlement letters are potential land-mines in litigation. If a trade secrets plaintiff says anything beyond conveying the offer, those statements could help show bad faith. As with most letters, it's best to keep it short and to the point.

Do the Final Episodes of "Breaking Bad" Qualify As Trade Secrets?

For die-hard fans of the greatest TV show of all time, these next six weeks are absolute gold.

Which led me to think: Do the plot lines over these final eight episodes qualify as "trade secrets"? Put another way, if one of the show's insiders - an actor, a writer, a key grip - published the final episodes' general plot narrative (online or in an interview), would the owners of the show - AMC - have a claim for trade secret misappropriation?

As many readers probably know, the test for determining a trade secret is relatively straightforward. An owner must show both: (a) that the information is economically valuable because of its secrecy; and (b) that it instituted reasonable security measures to protect the information.

So let's apply this to the final episodes of Breaking Bad and see if we can answer this question.

Economically Valuable Information

One argument weighing against trade secret status for the final episodes is that the information - that is the scripts and plot - are valuable as much for their novelty as for their secrecy. Secondarily, one could argue that the viewers would watch Breaking Bad even if the ending were either known or easily predictable. With this, I would disagree.

As to the first possible contention, every television show has some degree of originality, and as great as Breaking Bad is, it's not necessarily novel. After The Sopranos, it's hard to call a serial drama featuring a disaffected, criminal white male as "novel." In fact, it seems that virtually every new iteration of prestige television has such a protagonist (except, perhaps, for Orange Is the New Black).

So, since the series is not "novel," the argument for granting the last eight episodes trade secret status strengthens. That leads to the second possible argument against trade secret status: would people watch regardless of the ending? From my point of view, there are two key factors that indicate the story derives great value from its ability to hold its ending secret.

First, the show's true calling card from the beginning has been the parlor game begging viewers to speculate about the end. In other words, we know Walter White breaks bad from the first episode. Walt has cancer, meaning the show's lifespan is naturally limited. Add to the mix the compressed time frame over which the plot develops - two years' story time spread over six seasons - and the show has a frenetic, building pace that singularly drives viewers to speculate as to the ending. Since the focal point of the show always has been about the end, the plot that develops in the final season naturally has a high degree of intangible value.

Second, somewhat incredibly, Breaking Bad's viewership doubled from the last episode of Season Five to the first episode of the Season Six. This is staggering, if not ridiculous, for a serial drama that makes no sense if you jump in and start watching mid-stream. And it's due almost entirely to word-of-mouth. That is to say, those who've watched the show from the beginning have told their friends to get caught up because the end is near. Viewers of the show experience the show as much the day after it airs by reading the endless recaps and listening to insider podcasts, all of which contain a heavy undercurrent of how each episode builds towards the conclusion and what might happen in the last few episodes.

In all likelihood, 3 million new viewers have decided to watch over 50 hours of television in the past calendar year simply because the end is coming. The increased ratings for Breaking Bad likely have allowed the show to generate more advertising revenue (and possibly spin-offs for AMC), and this is mainly attributable to the fact the show is ending. Therefore, it seems logical that the narrative of the final episodes constitute some of the most valuable information about the show.

Secrecy Measures

This is somewhat of an unknown, simply because I don't know exactly what the owners of Breaking Bad have done to protect the plot details. But, from what's available in the public domain, the secrecy steps appear to be somewhat legendary.

We know from recent interviews that one of the supporting characters - "Lydia" - received scripts for the final episodes that redacted all lines but hers. We also know the scripts created by the show's writers generally contain code names (they're not labeled, for instance, Breaking Bad), ostensibly to guard against the impact of some accidental disclosure. The show has contracts with vendors that are secret and that don't reference the show at all, such that many vendors apparently don't even know they are supplying goods or services to Breaking Bad. These may seem like extreme security measures, but it signifies the show believes its ending has great value.

We also know creator Vince Gilligan will not allow previews of the coming show. That is, at the end of, say, Episode 1, we don't see scenes from Episode 2. Nor does the show preview the show in commercial spots during the week. In fact, Gilligan only will do a very short (and very oblique, to put it mildly) teaser on AMC's recap show, Talking Bad, that shows a still photo from the coming episode. His commentary is so trite as to be meaningless.

So the answer to me is a clear "yes." The plot lines for the remaining episodes qualify as legal trade secrets. But like many trade secrets, their shelf life is limited. In six weeks, all of this information will be in the public domain, and the plots lose any legal protection (except for copyright law, which is sort of besides the point for this post).

Until the final episode has wrapped, any of the show's insiders who know how it will end would be well-advised to tread lightly.

(Many thanks to Eric Ostroff for inspiring this post, based on his July entry on WWE wrestling. Eric and I reach somewhat different conclusions, incidentally.)

More from Tradesmen Int'l v. Black: Analyzing Judge Hamilton's Concurring Opinion

When construction staffing industry titan Tradesmen International lost its appeal in the Seventh Circuit, it suffered more than just a defeat in a particular lawsuit that (in my opinion) it had no expectation of winning.

In the course of its analysis, the Court of Appeals made it perfectly clear that Tradesmen's non-compete was unenforceable under Ohio law. As Judge Tinder noted in his opinion, the non-compete had a nationwide reach and extended to all Tradesmen customers and prospects throughout the country even though the individual defendants worked solely in Indiana. Consequently, the agreement went far beyond what was necessary to protect Tradesmen's business interests.

To me, one of the more interesting aspects of the Seventh Circuit's ruling was Judge David Hamilton's concurring opinion and his discussion of the blue-pencil rule, which generally deals with a court's willingness to strike overbroad portions of a non-compete.

That Judge Hamilton wrote separately in this case is not surprising. During oral argument, it was clear to me he was troubled by the scope of Tradesmen's agreement and what precisely it was trying to protect. Though he is the newest member of the Seventh Circuit, Judge Hamilton quickly has become known as an active questioner during argument. And this case provided him the opportunity to live up to that reputation. Judge Hamilton has made it known in interviews that he has a great interest in the law of non-compete agreements and trade secrets.

Although he agreed with the majority opinion, Judge Hamilton wrote about the intersection of choice-of-law clauses and the blue-pencil rule. In Tradesmen, the individual non-compete agreements all contained Ohio choice-of-law provisions. The choice isn't unreasonable, since Tradesmen is an Ohio-based company with a nationwide footprint. Businesses certainly have an interest in seeing that its contracts are interpreted under a uniform set of rules. But the case potentially posed a significant choice-of-law issue because the individual defendants were Indiana citizens, and the litigation took place in Illinois.

Judge Hamilton, though, is troubled (and has been in the past) by courts' willingness to enforce choice-of-law clauses when another state has a greater interest in the case and the chosen state's law embraces an employer-friendly blue-pencil rule. As he wrote, even though most states assess non-competes under a general rule of reason framework, "even a gentle tap on that fragile surface of similarity shows important differences from state to state."

According to Judge Hamilton, courts should "not discount too quickly the force of ... public policy" that certain states have adopted when refusing to enforce overbroad non-compete agreements. In his mind, a state's unwillingness to rewrite or pare back non-compete agreements can be a strong enough public policy to invalidate a choice-of-law clause.

As an example, Indiana courts - like many others - subscribes to a strict blue-pencil rule. This means a court will not rewrite an overbroad contract, but will sever offending clauses from the rest of the agreement. States like Ohio, and to a lesser degree Illinois, have different policies (nuanced though they may be) that allow for courts to modify agreements or enforce them to the extent they are reasonable.

Is this a strong enough difference in public policy to invalidate a choice-of-law clause?

Judge Hamilton thinks it might be for a very pragmatic reason: an employer like Tradesmen can draft an obviously unenforceable contract and throw it to the courts to enforce a reasonable contract the parties could have signed instead. A state's unwillingness to adopt a liberal rule allowing for partial enforcement may signal a broader public policy that the state "protect[s] employees from overly broad coveants." The employer-friendly rule impacts employees who may not have the ability to obtain firm guidance on what type of competitive activity is prohibited legally, even with the sound advice of counsel.

Judge Hamilton addressed this same public policy issue in a lengthy opinion when he sat as a district court judge in the Southern District of Indiana. The case was Dearborn v. Everett J. Prescott, Inc., 486 F. Supp. 2d 802 (S.D. Ind. 2007), and the case had strong similarities to some of the issues in the Tradesmen suit concerning choice-of-law. Though his opinion in Dearborn was thoughtful and extremely thorough, I didn't entirely agree with everything Judge Hamilton wrote in that case. Still, his reasoning has great appeal, for it recognizes the critical role the blue-pencil rule plays in non-compete suits. Judge Hamilton's concurrence in Tradesmen rings many of the same alarm bells he struck in Dearborn concerning choice-of-law.

Divining when a state's public policy is so strong as to override a contractual choice-of-law clause is no easy task. To me, courts could look at this one of three ways:

(1) Has the legislature enacted a clear statement of public policy? This is the easy analysis, because legislatures typically bear the laboring oar of setting forth public policy choices. As a result, states that have strong legislative enactments on non-competes - California, North Dakota, and Oklahoma on the employee side; Florida on the employer side - present obvious examples of when parties will have to confront critical choice-of-law issues.

(2) Have courts expressed a consistent, widely applied rule that clearly expresses a public policy choice? This becomes more nuanced because non-compete cases are so fact-specific. But, taking the blue-pencil rule as an example, if a state's case law shows a uniform pattern where courts are unwilling to rewrite or modify overbroad covenants, this may rise to the level of a public policy sufficient to invalidate a choice-of-law clause. Illinois, for instance, has suggested in recent years that despite its black-letter principle of allowing modification of overbroad non-competes, public policy considerations may not allow a court to do the work an employer should have done when drafting contracts.

(3) Could the difference in state law change the outcome? This approach would take a broader view of public policy, and to me it's not the proper analysis. For instance, in some (but not all) states, "continued employment" is sufficient consideration to enforce a non-compete signed after the start of employment. Certain states seem to have broader pronouncements that a non-compete cannot extend to "prospective" customers. To be sure, these are significant differences depending on the facts of the case, and they well may be dispositive in litigation. But they are really at the edges of a state's public policy as to enforcement. Courts long have recognized that mere differences in a state's law don't rise to the level of a strong public policy.

Judge Hamilton seems to subscribe to the second approach, and he views a state's willingness to rewrite non-competes as a strong enough choice to implicate public policy concerns. Ultimately, this may signal the Seventh Circuit's willingness to examine choice-of-law issues more carefully and retreate from prior decisions where the court seemingly has deferred to a choice-of-law clause as long as it has some connection to the dispute.

In Tradesmen, I didn't make an issue out of choice-of-law for the simple reason that Tradesmen never could point to any evidence my clients breached any agreement. The issue was, to be frank, moot and not worth spending a nickel of legal fees over. Had my clients decided to challenge the enforceability of the contracts, then certainly choice-of-law would have been a more significant legal issue to consider.

Seventh Circuit: Test for Determining "Bad Faith" In Trade Secrets Case Is Common Sense

This is a case I know a little something about.

When Tradesmen International sued my clients in May of 2010 , the outcome was already clear. The claims were garden-variety; the facts weren't. The individual defendants moved out of state to avoid the territorial restriction of their non-compete contracts to form a new business that supplied labor to the construction industry.

Tradesmen elected to take the dreaded shotgun approach to litigation. Instead of honing in on the contract-based claims (which it was destined to lose), it made a broad allegation of trade secrets theft. In particular, it claimed that Dun and Bradstreet reports - purchased through a commercial service for a fee and which some of the defendants had access to - were "trade secrets" that independently barred my clients from competing.

There were a couple of, to put it mildly, problems with this theory:

1. Anyone can buy Dun and Bradstreet reports, which my clients did after they left Tradesmen.

2. Tradesmen took virtually no steps (I say, none) to preserve the "secrecy" over these reports (for good reason; such security measures would yield no marginal benefit given their availability).

3. Tradesmen admitted my clients never used the reports they had at Tradesmen to build their business.

(Actually, there were tons of other problems, but I'll have to simply ask you to check out the briefs I filed. I can't do justice in a blog post to this train-wreck of a case.)

So when the defendants successfully obtained summary judgment, I moved for my legal fees under the Illinois Trade Secrets Act. Like many versions of the Uniform Trade Secrets Act, the Illinois version allows for fee-shifting if a plaintiff makes a claim of misappropriation in "bad faith." To me, there was virtually no doubt Tradesmen pursued its claim in bad faith, but Illinois courts never addressed how this provision should be interpreted. And the district court judge had no guidance.

Ultimately, Magistrate Judge Bernthal addressed a novel issue of Illinois law and ruled the trade secrets claim had to have been "filed" in bad faith rather than "maintained" in bad faith. That later was the essence of my argument. In short, I argued a more flexible standard was appropriate since trade secrets claims have the capacity to serve anti-competitive goals, as exemplified I felt by Tradesmen's litigation conduct.

The Seventh Circuit agreed and reversed the district court order. A copy of the Opinion is embedded below. The court held that a defendant is liable for fees if it filed or maintained a trade secrets claim in bad faith. More particularly, the court stated "common sense" supports such an interpretation because "a plaintiff makes a claim in bad faith if she continues to pursue a lawsuit - even after it becomes clear that she has no chance to win the lawsuit - in order to cause harm to the defendant." Because the district court had used a narrow, "point-of-filing" inquiry, it didn't consider the proper range of factors bearing upon bad faith. And it didn't examine the "no chance to win" scenario that I felt should have been the focus of the bad faith motion.

For my clients, the issue is of obviously of great significance. But for the law, what's the impact? In my mind, a couple of considerations come to mind:

First, trade secrets plaintiffs have a greater incentive to investigate and develop their claims. They cannot, in other words, hide behind what they believed to be true at the time of filing the lawsuit and then sit back and tax the defendants in the form of lawyer's fees to achieve a win. This should encourage greater scrutiny over claims that pose a great risk of serving an anti-competitive purpose and will require a continuing reassessment of a case during litigation. In my appellate brief, I discussed this at length and argued for a flexible inquiry that takes into account the unique dynamics of trade secrets suits.

Second, fee hearings at the conclusion of a lawsuit will require a district court to be flexible in what factors it considers. Courts normally consider both objective and subjective factors to determine bad faith. In other words, what did the plaintiff do and what did it say? The inquiries overlap to a great extent, because often times the best evidence of intent is the lack of merit. With a broader standard to consider, courts will have to examine the record, the development of the claims, discovery answers, litigation conduct, and a failure of proof on key elements to establish the cause of action.

Third, if a defendant claims a suit has been "maintained" in bad faith, it must be prepared to make an articulable, intelligent analysis of when the bad faith began. Put another way, it will need to look at key moments of the lawsuit and identify that point when a continuum of "bad faith factors" coalesces into actual bad faith. This likely means a fee hearing will be a combination of evidence presentation (a mini-trial of the plaintiff's low moments, in other words) and legal argument.

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In my next post, I'll discuss the Seventh Circuit's analysis of Tradesmen's overbroad non-compete agreement and how some of the key facts in my case played into the court's extended discussion as to contract enforceability.

Tradesmen Int'l v. Black - Seventh Circuit Opinion by Ken Vanko