Unreasonable Settlement Demands Illustrate Bad Faith In Trade Secrets Cases

Most attorneys believe everything said in a settlement letter is privileged through the Rules of Evidence.

This is decidedly not so.

The purpose of the evidentiary privilege is to preclude a jury from concluding that an offer to resolve a case suggests liability (on the part of the defendant) or weakness (on the part of the plaintiff). In trade secrets disputes, though, settlement statements that rise to the level of specious demands are not protected because they don't pose a risk of prejudicing a jury.

Trade secrets cases can go south in a hurry unless a plaintiff has done serious homework. And even if there has been a misappropriation, many times the plaintiff will have no shot at proving damages. That, however, does not preclude a plaintiff from making an outrageous demand. There are a number of courts that have assessed unreasonable settlement positions in the context of bad faith fee petitions for prevailing defendants.

An interesting, though non-precedential, decision from the Court of Appeal of California in Aerotek, Inc. v. The Johnson Group Staffing Co., Inc., affirmed a bad faith fee award of over $700,000. The court specifically looked at unreasonable settlement demands the plaintiff made, including a demand following a loss at trial, as evidence of bad faith.

Also of interest to the court:

• An expert's apparent unawareness that one of the customers on which he based his lost profits calculation was no longer in business; and
• A third-party witness's testimony that a plaintiff representative talked about the plaintiff's deep pockets and intent to shut the defendant's business down.

The interesting part of the case was the fact that the plaintiff actually won at the first trial, and the defendant stipulated that the customer list at issue was in fact a trade secret. Under such facts, its unusual to see a court find bad faith on the part of the plaintiff in bringing the case.

However, in California, there already is a strong public policy favoring open competition. Judges tend to view these cases more skeptically to begin with, and a case that might appear somewhat close still can yield a bad faith finding in California. Ultimately, it was clear that the plaintiff in Aerotek had a foundering case and doubled down. Maintaining a bad case will not endear any plaintiff's lawyer to the judge.